The following chart compares the change in market price of Horizon’s common stock since December 31, 2010 to that of publicly traded banks in Indiana and Michigan with assets greater than $500 million, excluding the reinvestment of dividends.
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Period Ending
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Index
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December 31
2010
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December 31
2011
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December 31
2012
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December 31
2013
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December 31
2014
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December 31
2015
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Horizon Bancorp
|
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|
100.00
|
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|
97.73
|
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166.21
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214.26
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221.11
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236.50
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Indiana Banks
(1)
|
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|
100.00
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|
102.15
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109.89
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150.84
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157.23
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162.16
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Michigan Banks
(1)
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|
100.00
|
|
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|
99.28
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|
118.24
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|
165.38
|
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|
168.06
|
|
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|
193.00
|
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|
(1) excludes merger targets
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Source : SNL Financial LC, Charlottesville, VA
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Copyright 2015
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www.snl.com
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The other information regarding Horizon’s common stock, including the approximate number of holders of the common stock, is included under the caption “Horizon’s Common Stock and Related Stockholders Matters” in Item 8 below, which is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is incorporated by reference to the information appearing under the caption “Summary of Selected Financial Data” in Item 8 of this Form 10-K.
31
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northern and Central Indiana and Southwestern and Central Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. All share data included below has been adjusted to reflect Horizon’s three-for-two stock splits paid on November 9, 2012 and December 9, 2011.
Following are some highlights of Horizon’s financial performance during 2015:
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•
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Net income for the year ending December 31, 2015 was $20.5 million or $1.89 diluted earnings per share.
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|
•
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|
Excluding merger expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the year ending December 31, 2015 increased 29.0% compared to the year ending December 31, 2014 to $23.6 million or $2.18 diluted earnings per share.
|
|
•
|
|
Net interest income for the year ending December 31, 2015 increased 18.7% or $11.8 million compared to the year ending December 31, 2014.
|
|
•
|
|
Non-interest income for the year ending December 31, 2015 increased 15.7% or $4.1 million compared to the year ending December 31, 2014.
|
|
•
|
|
Commercial loans surpassed $800.0 million during the fourth quarter of 2015 for the first time in the Company’s history, ending the year at $805.0 million.
|
|
•
|
|
Total loans, excluding acquired loans, increased 10.7% or $148.0 million during the year ending December 31, 2015.
|
|
•
|
|
Excluding merger expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, return on average assets was 1.00% for the year ending December 31, 2015.
|
|
•
|
|
Excluding merger expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, return on average common equity was 11.36% for the year ending December 31, 2015.
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|
•
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Non-performing loans to total loans as of December 31, 2015 were 0.95% compared to 1.62% as of December 31, 2014.
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|
•
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|
Substandard loans totaled $25.1 million as of December 31, 2015, a decrease of $2.6 million from $27.7 million as of December 31, 2014.
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•
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|
Horizon’s tangible book value per share increased to $16.53 at December 31, 2015, compared to $16.26 at December 31, 2014 and $14.97 at December 31, 2013.
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|
•
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Horizon Bank’s capital ratios, including Tier 1 Capital to Average Assets of 8.77% and Total Capital to Risk Weighted Assets of 12.57% as of December 31, 2015, continue to be well above the regulatory standards for well-capitalized banks.
|
Critical Accounting Policies
The Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for 2015 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses, goodwill and intangible assets, mortgage servicing rights, derivative instruments and valuation measurements as critical accounting policies.
32
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
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.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (FASB ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Accordingly, allowances for credit losses related to these loans are not carried over and recorded at the acquisition dates. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC 310-30, but for which a discount is attributable, at least in part to the credit quality, are also accounted for under this guidance. As a result, related discounts are recognized subsequently through accretion based on the expected cash flows of the acquired loans. For purposes of applying FASB ASC 310-30, loans acquired in business combinations are aggregated into pools of loans with common risk characteristics.
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 December 31, 2015, Horizon had core deposit intangibles of $7.4 million subject to amortization and $49.6 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 December 31, 2015 was $27.96 per share compared to a tangible book value of $16.53 per common share. Horizon’s return on average assets was 87 basis points for the year ending December 31, 2015.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value.
33
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
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.
34
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Analysis of Financial Condition
Horizon’s total assets were $2.7 billion as of December 31, 2015, an increase of $575.5 million from December 31, 2014.
Investment Securities
Investment securities totaled $632.6 million at December 31, 2015, and consisted of Treasury and federal agency securities of $11.8 million (1.9%); state and municipal securities of $221.4 million (35.0%); federal agency mortgage-backed pools of $234.1 million and federal agency collateralized mortgage obligations of $165.3 million (63.1%); and corporate securities of $54,000 (0.0%). Investment securities increased $143.1 million during 2015 primarily as a result of cash received from the Peoples merger.
As indicated above, 63.1% of the investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage-backed securities and collateralized mortgage obligations have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2015, the mortgage-backed securities and collateralized mortgage obligations in the investment portfolio had an average duration of three years. Securities that have interest rates above current market rates are purchased at a premium. Management monitors these investments periodically for other than temporary impairment by obtaining and reviewing the underlying collateral details and has concluded at December 31, 2015, any unrealized loss is temporary and that the Company has the intent and ability to hold these investments to maturity.
Available-for-sale municipal securities are priced by a third party using a pricing grid which estimates prices based on recent sales of similar securities. All municipal securities are investment grade or local non-rated issues and management does not believe there is other than temporary deterioration in market value. A credit review is performed annually on the municipal securities portfolio.
At December 31, 2015, 70.3% and at December 31, 2014, 66.1% of investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses recorded, net of tax, directly to stockholders’ equity. Net appreciation on these securities totaled $920,000, which resulted in a balance of $598,000, net of tax, included in stockholders’ equity at December 31, 2015. This compared to $2.6 million, net of tax, included in stockholders’ equity at December 31, 2014.
Fair value is defined 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. A fair value hierarchy is also established which requires an entity to maximize the use of observable and minimize the use of unobservable inputs. 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.
|
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There are no Level 1 securities. 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 Federal agency mortgage-backed pools. For Level 2 securities, Horizon uses a third party service to
35
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
determine fair value. In performing the valuations, the pricing service relies on models that consider security-specific details as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions. To verify the reasonableness of the fair value determination by the service, Horizon has a portion of the Level 2 securities priced by an independent securities broker-dealer.
Unrealized gains and losses on available-for-sale securities, deemed temporary, are recorded, net of income tax, in a separate component of other comprehensive income on the balance sheet. No unrealized losses were deemed to be “other-than-temporary.”
As a member of the Federal Reserve and Federal Home Loan Bank systems, Horizon is required to maintain an investment in the common stock of each entity. The investment in common stock is based on a predetermined formula. At December 31, 2015, Horizon had investments in the common stock of the Federal Reserve and Federal Home Loan Banks totaling $13.8 million and at December 31, 2014, investments totaled $11.3 million.
At December 31, 2015, Horizon did not maintain a trading account.
For more information about securities, see Note 4 — Securities to the Consolidated Financial Statements at Item 8.
Loans
Total loans, net of deferred fees/costs, the principal earning asset of the Bank, were $1.7 billion at December 31, 2015. The current level of total loans increased 26.9% from the December 31, 2014, level of $1.4 billion. The table below provides comparative detail on the loan categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
Dollar
Change
|
|
|
Percent
Change
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital and equipment
|
|
$
|
381,245
|
|
|
$
|
300,940
|
|
|
$
|
80,305
|
|
|
|
26.7
|
%
|
Real estate, including agriculture
|
|
|
391,668
|
|
|
|
343,455
|
|
|
|
48,213
|
|
|
|
14.0
|
%
|
Tax exempt
|
|
|
8,674
|
|
|
|
8,595
|
|
|
|
79
|
|
|
|
0.9
|
%
|
Other
|
|
|
23,408
|
|
|
|
21,324
|
|
|
|
2,084
|
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
804,995
|
|
|
|
674,314
|
|
|
|
130,681
|
|
|
|
19.4
|
%
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1–4 family
|
|
|
433,015
|
|
|
|
250,799
|
|
|
|
182,216
|
|
|
|
72.7
|
%
|
Other
|
|
|
4,129
|
|
|
|
3,826
|
|
|
|
303
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
437,144
|
|
|
|
254,625
|
|
|
|
182,519
|
|
|
|
71.7
|
%
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
168,397
|
|
|
|
154,538
|
|
|
|
13,859
|
|
|
|
9.0
|
%
|
Recreation
|
|
|
5,365
|
|
|
|
5,673
|
|
|
|
(308
|
)
|
|
|
-5.4
|
%
|
Real estate/home improvement
|
|
|
47,015
|
|
|
|
38,288
|
|
|
|
8,727
|
|
|
|
22.8
|
%
|
Home equity
|
|
|
127,113
|
|
|
|
112,426
|
|
|
|
14,687
|
|
|
|
13.1
|
%
|
Unsecured
|
|
|
4,120
|
|
|
|
3,613
|
|
|
|
507
|
|
|
|
14.0
|
%
|
Other
|
|
|
10,290
|
|
|
|
5,921
|
|
|
|
4,369
|
|
|
|
73.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
362,300
|
|
|
|
320,459
|
|
|
|
41,841
|
|
|
|
13.1
|
%
|
|
|
|
|
|
Mortgage warehouse
|
|
|
144,692
|
|
|
|
129,156
|
|
|
|
15,536
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,749,131
|
|
|
|
1,378,554
|
|
|
|
370,577
|
|
|
|
26.9
|
%
|
Allowance for loan losses
|
|
|
(14,534
|
)
|
|
|
(16,501
|
)
|
|
|
1,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,734,597
|
|
|
$
|
1,362,053
|
|
|
$
|
372,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements as well as an internal loan review of consumer and small business loans. The Bank also uses an independent third-party loan review function that regularly reviews asset quality.
Changes in the mix of the loan portfolio averages are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Commercial
|
|
$
|
743,175
|
|
|
$
|
620,809
|
|
|
$
|
490,137
|
|
Real estate
|
|
|
368,653
|
|
|
|
234,335
|
|
|
|
195,520
|
|
Mortgage warehouse
|
|
|
138,137
|
|
|
|
95,070
|
|
|
|
126,912
|
|
Consumer
|
|
|
343,825
|
|
|
|
297,296
|
|
|
|
280,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans
|
|
$
|
1,593,790
|
|
|
$
|
1,247,510
|
|
|
$
|
1,092,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans
Commercial loans totaled $805.0 million, or 46.0% of total loans as of December 31, 2015, compared to $674.3 million, or 48.9% as of December 31, 2014. The increase during 2015 was primarily related to the $67.4 million of commercial loans acquired in the Peoples acquisition along with organic growth of $63.2 million net of principal reductions from payments.
Commercial loans consisted of the following types of loans at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Number
|
|
|
Amount
|
|
|
Percent of
Portfolio
|
|
|
Number
|
|
|
Amount
|
|
|
Percent of
Portfolio
|
|
SBA guaranteed loans
|
|
|
251
|
|
|
$
|
54,549
|
|
|
|
6.8
|
%
|
|
|
232
|
|
|
$
|
47,269
|
|
|
|
7.0
|
%
|
Municipal government
|
|
|
1
|
|
|
|
447
|
|
|
|
0.1
|
%
|
|
|
1
|
|
|
|
548
|
|
|
|
0.1
|
%
|
Lines of credit
|
|
|
927
|
|
|
|
153,080
|
|
|
|
19.0
|
%
|
|
|
714
|
|
|
|
114,779
|
|
|
|
17.0
|
%
|
Real estate and equipment term loans
|
|
|
1,834
|
|
|
|
596,919
|
|
|
|
74.2
|
%
|
|
|
1,432
|
|
|
|
511,718
|
|
|
|
75.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,013
|
|
|
$
|
804,995
|
|
|
|
100.0
|
%
|
|
|
2,379
|
|
|
$
|
674,314
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate term loans with a book value of $117.3 million and a fair value of $115.5 million have been swapped to a variable rate using derivative instruments. The loans are carried at fair value in the financial statements and the related swap is carried at fair value and is included with other liabilities in the balance sheet. The recognition of the loan and swap fair values are recorded in the income statement and for 2015 equally offset each other. Fair values are determined by the counter party using a proprietary model that uses live market inputs to value interest rate swaps. The model is subject to daily market tests as current and future positions are priced and valued. These are Level 3 inputs under the fair value hierarchy as described above.
At December 31, 2015, the commercial loan portfolio held $91.7 million of adjustable rate loans that had interest rate floors in the terms of the note. Of the commercial loans with interest rate floors, loans totaling $72.4 million were at their floor at December 31, 2015.
Residential Real Estate Loans
Residential real estate loans totaled $437.1 million or 25.0% of total loans as of December 31, 2015, compared to $254.6 million or 18.5% of total loans as of December 31, 2014. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio. The increase during 2015 was primarily related to the $137.3 million of real estate loans acquired in the Peoples acquisition along with organic growth of $45.2 million net of principal reductions from payments.
37
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
In addition to the customary real estate loans described above, the Bank also had outstanding on December 31, 2015, $127.1 million in home equity lines of credit compared to $112.4 million at December 31, 2014. Credit lines normally limit the loan to collateral value to no more than 89%. Home equity credit lines are primarily not combined with a first mortgage and are therefore evaluated in the allowance for loan losses as a separate pool. These loans are classified as consumer loans in the table above and in Note 5 of the Consolidated Financial Statements at Item 8.
Residential real estate lending is a highly competitive business. As of December 31, 2015, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of
Portfolio
|
|
|
Yield
|
|
|
Amount
|
|
|
Percent of
Portfolio
|
|
|
Yield
|
|
Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly payment
|
|
$
|
114,035
|
|
|
|
26.1
|
%
|
|
|
4.20
|
%
|
|
$
|
91,605
|
|
|
|
36.0
|
%
|
|
|
4.50
|
%
|
Biweekly payment
|
|
|
151
|
|
|
|
0.0
|
%
|
|
|
6.20
|
%
|
|
|
198
|
|
|
|
0.1
|
%
|
|
|
6.14
|
%
|
Adjustable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly payment
|
|
|
322,959
|
|
|
|
73.9
|
%
|
|
|
3.84
|
%
|
|
|
162,822
|
|
|
|
63.9
|
%
|
|
|
3.69
|
%
|
Biweekly payment
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
437,145
|
|
|
|
100.0
|
%
|
|
|
3.93
|
%
|
|
|
254,625
|
|
|
|
100.0
|
%
|
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
7,917
|
|
|
|
|
|
|
|
|
|
|
|
6,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
$
|
445,062
|
|
|
|
|
|
|
|
|
|
|
$
|
260,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in fixed and adjustable rate residential mortgage loans during 2015 was primarily due to the real estate loans acquired in the Peoples acquisition as well as organic growth. In addition to the real estate loan portfolio, the Bank originates and sells real estate loans and retains the servicing rights. During 2015 and 2014, approximately $302.4 million and $229.2 million, respectively, of residential mortgages were sold into the secondary market. Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.2 billion and $1.0 billion at December 31, 2015 and 2014.
The Bank began capitalizing mortgage servicing rights during 2000, and the aggregate fair value of capitalized mortgage servicing rights at December 31, 2015, totaled approximately $10.8 million compared to the carrying value of $8.9 million. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1
|
|
$
|
7,980
|
|
|
$
|
7,428
|
|
|
$
|
6,169
|
|
Servicing rights capitalized
|
|
|
2,974
|
|
|
|
2,280
|
|
|
|
2,535
|
|
Amortization of servicing rights
|
|
|
(1,683
|
)
|
|
|
(1,728
|
)
|
|
|
(1,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
|
9,271
|
|
|
|
7,980
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1
|
|
|
(338
|
)
|
|
|
(389
|
)
|
|
|
(1,024
|
)
|
Additions
|
|
|
(130
|
)
|
|
|
(95
|
)
|
|
|
(54
|
)
|
Reductions
|
|
|
71
|
|
|
|
146
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
|
(397
|
)
|
|
|
(338
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net
|
|
$
|
8,874
|
|
|
$
|
7,642
|
|
|
$
|
7,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Mortgage Warehouse Loans
Horizon’s mortgage warehousing lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage and the related mortgagee are underwritten by Horizon to the end investor guidelines and assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchase an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the sales commitment and the mortgage company would not be able to repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
At December 31, 2015, the mortgage warehouse loan balance was $144.7 million compared to $129.2 million as of December 31, 2014. The increase in mortgage warehouse loans reflected a decrease in long-term interest rates during 2015 and the continued housing market recovery resulting in higher refinance volume.
Consumer Loans
Consumer loans totaled $362.3 million, or 20.7% of total loans as of December 31, 2015, compared to $320.5 million, or 23.2% as of December 31, 2014. The increase during 2015 was primarily related to the $19.6 million of consumer loans acquired in the Peoples acquisition along with organic growth of $22.2 million net of principal reductions from payments.
Allowance and Provision for Loan Losses/Critical Accounting Policy
At December 31, 2015, the allowance for loan losses was $14.5 million, or 0.83% of total loans outstanding, compared to $16.5 million, or 1.19% at December 31, 2014. The decrease in the ratio was primarily due to an increase in total loans from both organic growth and the Peoples acquisition and a decrease in the allowance for loan losses of $2.0 million. The decrease in the allowance for loan losses was the result of two commercial loans that were charged off during the fourth quarter of 2015 in the amount of $1.1 million for which $1.4 million had previously been reserved. During 2015, the expense for provision for loan losses totaled $3.2 million compared to $3.1 million in 2014. Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, was .99% as of December 31, 2015.
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (ALLL) by regularly reviewing the performance of all of its loan portfolios. As a result of its quarterly reviews, a provision for loan losses is determined to bring the total ALLL to a level called for by the analysis.
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 adequate to cover losses inherent in the loan portfolio as of December 31, 2015.
39
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-performing Loans
Non-performing loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning non-performing loans to an earning asset basis. Non-performing loans for the previous three years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Non-performing loans
|
|
$
|
16,680
|
|
|
$
|
22,442
|
|
|
$
|
18,277
|
|
Non-performing loans total 114.8%, 136.0% and 114.3% of the allowance for loan losses at December 31, 2015, 2014 and 2013, respectively. Non-performing loans at December 31, 2015 totaled $16.7 million, a decrease from a balance of $22.4 million as of December 31, 2014 and $18.3 million as of December 31, 2013. Non-performing loans as a percentage of total loans was 0.95% as of December 31, 2015, a decrease from 1.62% and 1.70% as of December 31, 2014 and December 31, 2013, respectively.
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, 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. (See Note 8 of the Consolidated Financial Statements at Item 8 for further discussion of impaired loans.)
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Other Real Estate Owned (OREO) net of any related allowance for OREO losses for the previous three years ending December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Other real estate owned
|
|
$
|
3,207
|
|
|
$
|
1,047
|
|
|
$
|
2,107
|
|
OREO totaled $3.2 million on December 31, 2015, an increase of $2.2 million from December 31, 2014 and $1.1 million from December 31, 2013. On December 31, 2015, OREO was comprised of 7 properties. Of these properties, two totaling $161,000 were commercial real estate and 5 totaling $3.0 million were residential real estate.
No mortgage warehouse loans were non-performing or OREO as of December 31, 2015, 2014 or 2013.
40
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Deferred Tax
Horizon had a net deferred tax asset totaling $5.2 million and $6.0 million as of December 31, 2015 and December 31, 2014, respectively. The following table shows the major components of deferred tax:
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
5,329
|
|
|
$
|
5,680
|
|
Net operating loss (from acquisitions)
|
|
|
1,679
|
|
|
|
3,509
|
|
Director and employee benefits
|
|
|
2,223
|
|
|
|
1,953
|
|
Unrealized loss on AFS securities and fair value hedge
|
|
|
711
|
|
|
|
588
|
|
Accrued Pension
|
|
|
1,725
|
|
|
|
—
|
|
Other
|
|
|
1,029
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
12,696
|
|
|
|
12,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,180
|
)
|
|
|
(1,563
|
)
|
Difference in expense recognition
|
|
|
—
|
|
|
|
—
|
|
State tax
|
|
|
(192
|
)
|
|
|
(126
|
)
|
Federal Home Loan Bank stock dividends
|
|
|
(343
|
)
|
|
|
(200
|
)
|
Difference in basis of intangible assets
|
|
|
(2,938
|
)
|
|
|
(2,839
|
)
|
FHLB Penalty
|
|
|
(123
|
)
|
|
|
(283
|
)
|
Other
|
|
|
(1,671
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(7,447
|
)
|
|
|
(6,314
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,249
|
|
|
$
|
6,012
|
|
|
|
|
|
|
|
|
|
|
Horizon anticipates continued earnings and therefore determined there is no impairment to this asset.
Deposits
The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and other sources when it can do so at interest rates and terms that are more favorable than those required for deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were $1.9 billion at December 31, 2015, compared to $1.5 billion at December 31, 2014. Average deposits and rates by category for the three years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Outstanding for the
Year Ending December 31
|
|
|
Average Rate Paid for the
Year Ending December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
314,840
|
|
|
$
|
258,523
|
|
|
$
|
219,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
671,493
|
|
|
|
582,916
|
|
|
|
528,738
|
|
|
|
0.12
|
%
|
|
|
0.12
|
%
|
|
|
0.13
|
%
|
Savings deposits
|
|
|
191,593
|
|
|
|
142,420
|
|
|
|
134,242
|
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
0.08
|
%
|
Money market
|
|
|
205,119
|
|
|
|
161,146
|
|
|
|
123,226
|
|
|
|
0.24
|
%
|
|
|
0.23
|
%
|
|
|
0.21
|
%
|
Time deposits
|
|
|
344,464
|
|
|
|
296,349
|
|
|
|
306,590
|
|
|
|
1.21
|
%
|
|
|
1.39
|
%
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,727,509
|
|
|
$
|
1,441,354
|
|
|
$
|
1,312,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $286.2 million increase in average deposits during 2015 was the result of an increase in the depositor base due to organic growth as well as the Peoples acquisition. The transactional accounts average balances, as the lower cost funding sources, increased $238.1 million and the average balances for higher cost time deposits increased $48.1 million. Horizon continually enhances its interest-bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets.
41
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Certificates of deposit of $250,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2015:
|
|
|
|
|
Due in three months or less
|
|
$
|
6,818
|
|
Due after three months through six months
|
|
|
13,774
|
|
Due after six months through one year
|
|
|
15,222
|
|
Due after one year
|
|
|
31,883
|
|
|
|
|
|
|
|
|
$
|
67,697
|
|
|
|
|
|
|
Interest expense on time certificates of $100,000 or more was approximately $2.3 million, $2.2 million, and $2.4 million for 2015, 2014 and 2013. Interest expense on time certificates of $250,000 or more was approximately $990,000 for 2015.
Off-Balance Sheet Arrangements
As of December 31, 2015, Horizon did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party and under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Contractual Obligations
The following tables summarize Horizon’s contractual obligations and other commitments to make payments as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Within
One Year
|
|
|
One to
Three Years
|
|
|
Three to
Five Years
|
|
|
After Five
Years
|
|
Certificates of Deposit
|
|
$
|
366,547
|
|
|
$
|
167,791
|
|
|
$
|
125,206
|
|
|
$
|
56,878
|
|
|
$
|
16,672
|
|
Borrowings
(1)
|
|
|
449,347
|
|
|
|
298,235
|
|
|
|
77,489
|
|
|
|
68,375
|
|
|
|
5,248
|
|
Subordinated debentures
(2)
|
|
|
32,798
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,798
|
|
(1)
|
Includes debt obligations to the Federal Home Loan Bank and term repurchase agreements with maturities beyond one year borrowed by Horizon’s banking subsidiary. See Note 13 in Horizon’s Consolidated Financial Statements at Item 8.
|
(2)
|
Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisitions of Alliance Bank in 2005, American Trust in 2009 and Heartland in 2012. See Note 15 in Horizon’s Consolidated Financial Statements at Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
Expiration by Period
|
|
|
|
Within One
Year
|
|
|
Greater
Than
One Year
|
|
Letters of credit
|
|
$
|
619
|
|
|
$
|
2,945
|
|
Unfunded loan commitments
|
|
|
91,450
|
|
|
|
377,353
|
|
42
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios for “well capitalized” banks at December 31, 2015. Stockholders’ equity totaled $266.8 million as of December 31, 2015, compared to $194.4 million as of December 31, 2014. At year-end 2015, the ratio of stockholders’ equity to assets was 10.06%, compared to 9.36% for 2014. Tangible equity to tangible assets was 7.60% at December 31, 2015, compared to 7.32% at December 31, 2014. Book value per common share at December 31, 2015 increased to $21.30, compared to $19.75 at December 31, 2014. Horizon’s capital increased during 2015 as a result of earnings and common stock issued in the Peoples acquisition, partially offset by a decrease in other comprehensive income and dividends declared.
In 2008, in connection with the issuance of preferred stock that was subsequently redeemed, Horizon issued a warrant to the Treasury to purchase shares of Horizon’s common stock. The Treasury sold the warrant to a third party, and at December 31, 2015, the warrant covered 481,510 shares with an exercise price of $7.79 per share. These warrants were exercised during 2015.
On August 25, 2011, the Company sold 12,500 shares of Series B Preferred Stock for aggregate consideration of $12.5 million, to the Treasury pursuant to the Small Business Lending Fund program. Concurrently with this transaction, Horizon redeemed all 18,750 shares of our Series A Preferred Stock that remained outstanding under the Treasury’s Capital Purchase Program. The redemption of the Series A Preferred Stock was funded by the $12.5 million in proceeds from the sale of the Series B Preferred Stock together with other available funds. On February 1, 2016 the Company redeemed all 12,500 shares of Series B Preferred Stock for $12,500,000 along with the final dividend payment of $10,416.67.
Horizon declared dividends in the amount of $.58 per share in 2015, $.51 per share in 2014, and $.42 per share in 2013. The dividend payout ratio (dividends as a percent of net income) was 29.9% for 2015, 25.7% for 2014, and 18.6% for 2013. For additional information regarding dividend conditions, see Note 1 of the Notes to the Consolidated Financial Statements at Item 8.
In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory business trust. Trust II sold $10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.95% (2.56% at December 31, 2015) and mature on October 21, 2034, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $17,500 were capitalized and were amortized to the October 31, 2009, first call date of the securities.
In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned statutory business trust. Trust III sold $12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.65% (2.26% at December 31, 2015) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $12,647 were capitalized and were being amortized to the first call date of the securities.
The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I, a wholly owned business trust (Alliance Trust) to sell $5.2 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Alliance. The junior subordinated debentures are
43
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 2.65% (3.26% at December 31, 2015) and mature in June 2034, and securities may be called at any quarterly interest payment date at par.
The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (Am Tru Trust), to sell $3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 2.85% (3.46% at December 31, 2015) and mature in March 2034, and securities may be called at any quarterly interest payment date at par. The carrying value was $3.1 million, net of the remaining purchase discount, at December 31, 2015.
The Company assumed additional debentures as the result of the Heartland merger in July 2013. In December 2006, Heartland. formed Heartland (IN) Statutory Trust II a wholly owned business trust (Heartland Trust), to sell $3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.67% (2.28% at December 31, 2015) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $1.7 million, net of the remaining purchase discount, at December 31, 2015.
The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense.
Results of Operations
Net Income
Consolidated net income was $20.5 million or $1.89 per diluted share in 2015, $18.1 million or $1.90 per diluted share in 2014, and $19.9 million or $2.17 per diluted share in 2013. The increase in net income from the previous year reflects an increase in net interest income of $11.8 million and an increase in non-interest income of $4.1 million, partially offset by an increase in the provision for loan losses of $104,000, non-interest expenses of $12.2 million and income taxes of $1.1 million. The decrease in diluted earnings per share compared to the previous year reflects an increase in diluted shares due to the Peoples acquisition. Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the year ended December 31, 2015 was $21.7 million or $2.00 diluted earnings per share compared to $16.5 million or $1.74 diluted earnings per share for the year ended December 31, 2014. Diluted earnings per share were also reduced by $0.01 for the twelve months ending December 31, 2015, $0.01 for the twelve months ending December 31, 2014 and $0.04 for the twelve months ending December 31, 2013 resulting from the payment of preferred stock dividends.
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.
44
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Net interest income during 2015 was $74.7 million, an increase of $11.8 million or 18.7% over the $63.0 million earned in 2014. Yields on the Company’s interest-earning assets decreased by 16 basis points to 4.20% during 2015 from 4.36% in 2014. Interest income increased $12.4 million to $88.6 million for 2015 from $76.2 million in 2014. This increase was due to increased volume in interest-earning assets and an increase in the recognition of interest income from the acquisition-related purchase accounting adjustments of approximately $300,000 from $2.7 million in 2014 to $3.0 million in 2015, partially offset by the lower yield on interest-earning assets.
Rates paid on interest-bearing liabilities decreased by 11 basis points during the same period due to the lower interest rate environment. Interest expense increased $632,000 from $13.2 million in 2014 to $13.9 million in 2015. This increase was due to increased volume of interest-bearing liabilities, partially offset by lower rates being paid. Due to a larger decrease in the yield on the Company’s interest-earning assets compared to the decrease in the rates paid on the Company’s interest-bearing liabilities, the net interest margin decreased 6 basis points from 3.62% for 2014 to 3.56% in 2015. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.42% for 2015 compared to 3.47% for 2014. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
December 31, 2013
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
10,264
|
|
|
$
|
11
|
|
|
|
0.11
|
%
|
|
$
|
6,246
|
|
|
$
|
11
|
|
|
|
0.18
|
%
|
|
$
|
8,468
|
|
|
$
|
21
|
|
|
|
0.25
|
%
|
Interest-earning deposits
|
|
|
14,045
|
|
|
|
10
|
|
|
|
0.07
|
%
|
|
|
7,087
|
|
|
|
10
|
|
|
|
0.14
|
%
|
|
|
7,720
|
|
|
|
19
|
|
|
|
0.25
|
%
|
Investment securities - taxable
|
|
|
394,976
|
|
|
|
8,700
|
|
|
|
2.20
|
%
|
|
|
387,013
|
|
|
|
9,323
|
|
|
|
2.41
|
%
|
|
|
371,594
|
|
|
|
8,401
|
|
|
|
2.26
|
%
|
Investment securities - non-taxable (1)
|
|
|
152,931
|
|
|
|
4,494
|
|
|
|
4.32
|
%
|
|
|
146,407
|
|
|
|
4,426
|
|
|
|
4.32
|
%
|
|
|
136,584
|
|
|
|
4,216
|
|
|
|
4.98
|
%
|
Loans receivable (2)(3)(4)
|
|
|
1,593,790
|
|
|
|
75,373
|
|
|
|
4.74
|
%
|
|
|
1,247,510
|
|
|
|
62,435
|
|
|
|
5.01
|
%
|
|
|
1,092,662
|
|
|
|
62,229
|
|
|
|
5.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (1)
|
|
|
2,166,006
|
|
|
|
88,588
|
|
|
|
4.20
|
%
|
|
|
1,794,263
|
|
|
|
76,205
|
|
|
|
4.36
|
%
|
|
|
1,617,028
|
|
|
|
74,886
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
31,692
|
|
|
|
|
|
|
|
|
|
|
|
27,168
|
|
|
|
|
|
|
|
|
|
|
|
24,548
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(16,351
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,945
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,677
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
179,138
|
|
|
|
|
|
|
|
|
|
|
|
144,803
|
|
|
|
|
|
|
|
|
|
|
|
134,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,360,485
|
|
|
|
|
|
|
|
|
|
|
$
|
1,950,289
|
|
|
|
|
|
|
|
|
|
|
$
|
1,757,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
1,438,026
|
|
|
$
|
5,559
|
|
|
|
0.39
|
%
|
|
$
|
1,182,831
|
|
|
$
|
5,257
|
|
|
|
0.44
|
%
|
|
$
|
1,092,796
|
|
|
$
|
5,672
|
|
|
|
0.52
|
%
|
Borrowings
|
|
|
336,618
|
|
|
|
6,286
|
|
|
|
1.87
|
%
|
|
|
281,649
|
|
|
|
5,956
|
|
|
|
2.11
|
%
|
|
|
234,927
|
|
|
|
5,821
|
|
|
|
2.48
|
%
|
Subordinated debentures
|
|
|
32,717
|
|
|
|
2,009
|
|
|
|
6.14
|
%
|
|
|
32,561
|
|
|
|
2,009
|
|
|
|
6.17
|
%
|
|
|
32,406
|
|
|
|
2,010
|
|
|
|
6.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,807,361
|
|
|
|
13,854
|
|
|
|
0.77
|
%
|
|
|
1,497,041
|
|
|
|
13,222
|
|
|
|
0.88
|
%
|
|
|
1,360,129
|
|
|
|
13,503
|
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
317,246
|
|
|
|
|
|
|
|
|
|
|
|
258,523
|
|
|
|
|
|
|
|
|
|
|
|
219,323
|
|
|
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
16,364
|
|
|
|
|
|
|
|
|
|
|
|
12,776
|
|
|
|
|
|
|
|
|
|
|
|
13,534
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
219,514
|
|
|
|
|
|
|
|
|
|
|
|
181,949
|
|
|
|
|
|
|
|
|
|
|
|
164,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,360,485
|
|
|
|
|
|
|
|
|
|
|
$
|
1,950,289
|
|
|
|
|
|
|
|
|
|
|
$
|
1,757,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
|
|
|
|
$
|
74,734
|
|
|
|
3.43
|
%
|
|
|
|
|
|
$
|
62,983
|
|
|
|
3.48
|
%
|
|
|
|
|
|
$
|
61,383
|
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a percent of average interest earning assets (1)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
3.96
|
%
|
(1)
|
Horizon has no foreign office and, accordingly, no assets or liabilities to foreign operations. Horizon’s subsidiary bank had no funds invested in Eurodollar Certificates of Deposit at December 31, 2015.
|
(2)
|
Yields are presented on a tax-equivalent basis.
|
45
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
(3)
|
Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.
|
(4)
|
Loan fees and late fees included in interest on loans aggregated $4.9 million, $4.3 million, and $4.6 million in 2015, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015-2014
|
|
|
2014-2013
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
Total
|
|
|
Due To
|
|
|
Due To
|
|
|
Total
|
|
|
Due To
|
|
|
Due To
|
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
(5
|
)
|
|
$
|
(10
|
)
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
Interest-earning deposits
|
|
|
—
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Investment securities - taxable
|
|
|
(623
|
)
|
|
|
189
|
|
|
|
(812
|
)
|
|
|
922
|
|
|
|
357
|
|
|
|
565
|
|
Investment securities - non-taxable
|
|
|
68
|
|
|
|
282
|
|
|
|
(214
|
)
|
|
|
210
|
|
|
|
466
|
|
|
|
(256
|
)
|
Loans receivable
|
|
|
12,938
|
|
|
|
16,571
|
|
|
|
(3,633
|
)
|
|
|
206
|
|
|
|
8,254
|
|
|
|
(8,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
12,383
|
|
|
|
17,054
|
|
|
|
(4,671
|
)
|
|
|
1,319
|
|
|
|
9,071
|
|
|
|
(7,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
302
|
|
|
|
1,042
|
|
|
|
(740
|
)
|
|
|
(415
|
)
|
|
|
443
|
|
|
|
(858
|
)
|
Borrowings
|
|
|
330
|
|
|
|
1,077
|
|
|
|
(747
|
)
|
|
|
135
|
|
|
|
1,060
|
|
|
|
(925
|
)
|
Subordinated debentures
|
|
|
—
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
632
|
|
|
|
2,129
|
|
|
|
(1,497
|
)
|
|
|
(281
|
)
|
|
|
1,513
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
11,751
|
|
|
$
|
14,925
|
|
|
$
|
(3,174
|
)
|
|
$
|
1,600
|
|
|
$
|
7,558
|
|
|
$
|
(5,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income during 2014 was $63.0 million, an increase of $1.6 million or 2.6% over the $61.4 million earned in 2013. Yields on the Company’s interest-earning assets decreased by 44 basis points to 4.36% during 2014 from 4.80% in 2013. Interest income increased $1.3 million to $76.2 million for 2014 from $74.9 million in 2013. This increase was due to increased volume in interest earning assets partially offset by the lower yield on interest-earning assets and a decrease in interest income from acquisition-related purchase accounting adjustments of $3.5 million from $6.3 million in 2013 to $2.7 million in 2014.
Rates paid on interest-bearing liabilities decreased by 11 basis points during the same period due to the lower interest rate environment. Interest expense decreased $281,000 from $13.5 million in 2013 to $13.2 million in 2014. This decrease was due to the lower rates being paid on the Company’s interest-bearing liabilities partially offset by the increased volume of interest-bearing liabilities. Due to a larger decrease in the yield on the Company’s interest-earning assets and the decrease in interest income from acquisition related purchase accounting adjustments compared to the decrease in the rates paid on the Company’s interest-bearing liabilities, the net interest margin decreased 34 basis points from 3.96% for 2013 to 3.62% in 2014. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.47% for 2014 compared to 3.57% for 2013.
Provision for Loan Losses
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (ALLL) by regularly reviewing the performance of its loan portfolios. The provision for loan losses totaled $3.2 million in 2015 compared to $3.1 million in 2014. The higher provision for loan losses in 2015 compared to the previous year was due to continued loan growth. Commercial loan net charge-offs during 2015 were $3.2 million, residential mortgage loan net charge-offs were $219,000, and consumer loan net charge-offs were $1.6 million for the year ending December 31, 2015.
During 2014, the provision for loan losses totaled $3.1 million, compared to $1.9 million in 2013. The higher provision for loan losses in 2014 compared to 2013 was due to loan growth as well as $1.0 million in charge-off related to one commercial credit in the third quarter of 2014 and a specific reserve of $560,000 placed on one commercial real estate loan that was moved to non-accrual status during the fourth quarter of 2014. Commercial loan net charge-offs during 2014 were $1.0 million, residential mortgage loan net charge-offs were $307,000, and consumer loan net charge-offs were $1.2 million for the year ending December 31, 2014.
46
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-interest Income
The following is a summary of changes in non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
2014 - 2015
|
|
|
|
|
|
2013 - 2014
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
Amount
Change
|
|
|
Percent
Change
|
|
|
December 31
2013
|
|
|
Amount
Change
|
|
|
Percent
Change
|
|
Non-interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
4,807
|
|
|
$
|
4,085
|
|
|
$
|
722
|
|
|
|
17.7
|
%
|
|
$
|
3,989
|
|
|
$
|
96
|
|
|
|
2.4
|
%
|
Wire transfer fees
|
|
|
633
|
|
|
|
557
|
|
|
|
76
|
|
|
|
13.6
|
%
|
|
|
697
|
|
|
|
(140
|
)
|
|
|
-20.1
|
%
|
Interchange fees
|
|
|
5,591
|
|
|
|
4,649
|
|
|
|
942
|
|
|
|
20.3
|
%
|
|
|
4,056
|
|
|
|
593
|
|
|
|
14.6
|
%
|
Fiduciary activities
|
|
|
5,637
|
|
|
|
4,738
|
|
|
|
899
|
|
|
|
19.0
|
%
|
|
|
4,337
|
|
|
|
401
|
|
|
|
9.2
|
%
|
Gain on sale of investment securities
|
|
|
189
|
|
|
|
988
|
|
|
|
(799
|
)
|
|
|
-80.9
|
%
|
|
|
374
|
|
|
|
614
|
|
|
|
164.2
|
%
|
Gain on sale of mortgage loans
|
|
|
10,055
|
|
|
|
8,395
|
|
|
|
1,660
|
|
|
|
19.8
|
%
|
|
|
8,794
|
|
|
|
(399
|
)
|
|
|
-4.5
|
%
|
Mortgage servicing net of impairment
|
|
|
993
|
|
|
|
805
|
|
|
|
188
|
|
|
|
23.4
|
%
|
|
|
1,521
|
|
|
|
(716
|
)
|
|
|
-47.1
|
%
|
Increase in cash surrender value of bank owned life insurance
|
|
|
1,249
|
|
|
|
1,047
|
|
|
|
202
|
|
|
|
19.3
|
%
|
|
|
1,035
|
|
|
|
12
|
|
|
|
1.2
|
%
|
Death benefit on officer life insurance
|
|
|
145
|
|
|
|
—
|
|
|
|
145
|
|
|
|
100.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0
|
%
|
Other income
|
|
|
1,103
|
|
|
|
1,013
|
|
|
|
90
|
|
|
|
8.9
|
%
|
|
|
1,103
|
|
|
|
(90
|
)
|
|
|
-8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
30,402
|
|
|
$
|
26,277
|
|
|
$
|
4,125
|
|
|
|
15.7
|
%
|
|
$
|
25,906
|
|
|
$
|
371
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in service charges on deposit accounts and interchange fee income in 2015 compared to 2014 was the result of growth in transactional deposit accounts and volume during 2015. Fiduciary activities income increased $899,000 during 2015 as a result of an increase in assets under management. During 2015, the Company originated approximately $302.4 million of mortgage loans to be sold on the secondary market, compared to $229.2 million in 2014. This increase in volume, partially offset by a decrease in the percentage earned on the sale of mortgage loans, increased the overall gain on sale of mortgage loans by $1.7 million compared to the prior year. Mortgage servicing net of impairment increased by $188,000 during 2015 compared to 2014 due to a larger portfolio of mortgage loans serviced during 2015. The cash surrender value of bank owned life insurance increased by $202,000 in 2015 due to an increase in the number of policies outstanding as a result of the Peoples acquisition. The Death Benefit on Bank owned life insurance increase by $145,000 in 2015 due to payment realized on one of the policies. These increases were partially offset a decrease in gain on sale of investment securities of $799,000 in 2015 due to a gain on sale of securities of $988,000 during the third quarter of 2014. This gain was the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. The sale of securities was also used to fund loan growth.
The increase in service charges on deposit accounts and interchange fee income in 2014 compared to 2013 was the result of growth in transactional deposit accounts and volume during 2014. Fiduciary activities income increased $401,000 during 2014 as a result of asset and market value increase. Gain on sale of securities increased $614,000 due to a gain on sale of securities of $988,000 during the third quarter of 2014. This gain was the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. The sale of securities was also used to fund loan growth. These increases were partially offset by decreases compared to 2013 in wire transfer fees, gain on sale of mortgage loans and mortgage servicing net of impairment. During 2014, the Company originated approximately $229.2 million of mortgage loans to be sold on the secondary market, compared to $346.4 million in 2013. This lower volume, partially offset by an increase in the percentage earned on the sale of mortgage loans, decreased the overall gain on sale of mortgage loans by $399,000 compared to the prior year. Mortgage servicing net of impairment decreased by $716,000 during 2014 compared to 2013 due to the recovery of impairment charges totaling $635,000 in 2013, partially offset by a larger portfolio of mortgage loans serviced during 2014.
47
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-interest Expense
The following is a summary of changes in non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
2013 - 2014
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
Amount
Change
|
|
|
Percent
Change
|
|
|
December 31
2013
|
|
|
Amount
Change
|
|
|
Percent
Change
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
25,284
|
|
|
$
|
22,859
|
|
|
$
|
2,425
|
|
|
|
10.6
|
%
|
|
$
|
21,164
|
|
|
$
|
1,695
|
|
|
|
8.0
|
%
|
Commission and bonuses
|
|
|
6,008
|
|
|
|
4,111
|
|
|
|
1,897
|
|
|
|
46.1
|
%
|
|
|
4,290
|
|
|
|
(179
|
)
|
|
|
-4.2
|
%
|
Employee benefits
|
|
|
6,420
|
|
|
|
5,712
|
|
|
|
708
|
|
|
|
12.4
|
%
|
|
|
5,578
|
|
|
|
134
|
|
|
|
2.4
|
%
|
Net occupancy expenses
|
|
|
6,400
|
|
|
|
5,607
|
|
|
|
793
|
|
|
|
14.1
|
%
|
|
|
4,984
|
|
|
|
623
|
|
|
|
12.5
|
%
|
Data processing
|
|
|
4,251
|
|
|
|
3,663
|
|
|
|
588
|
|
|
|
16.1
|
%
|
|
|
3,045
|
|
|
|
618
|
|
|
|
20.3
|
%
|
Professional fees
|
|
|
2,070
|
|
|
|
1,731
|
|
|
|
339
|
|
|
|
19.6
|
%
|
|
|
1,668
|
|
|
|
63
|
|
|
|
3.8
|
%
|
Outside services and consultants
|
|
|
5,735
|
|
|
|
3,250
|
|
|
|
2,485
|
|
|
|
76.5
|
%
|
|
|
2,412
|
|
|
|
838
|
|
|
|
34.7
|
%
|
Loan expense
|
|
|
5,379
|
|
|
|
4,770
|
|
|
|
609
|
|
|
|
12.8
|
%
|
|
|
4,668
|
|
|
|
102
|
|
|
|
2.2
|
%
|
FDIC deposit insurance
|
|
|
1,499
|
|
|
|
1,175
|
|
|
|
324
|
|
|
|
27.6
|
%
|
|
|
1,089
|
|
|
|
86
|
|
|
|
7.9
|
%
|
Other losses
|
|
|
432
|
|
|
|
(70
|
)
|
|
|
502
|
|
|
|
-717.1
|
%
|
|
|
807
|
|
|
|
(877
|
)
|
|
|
-108.7
|
%
|
Other expense
|
|
|
10,715
|
|
|
|
9,138
|
|
|
|
1,577
|
|
|
|
17.3
|
%
|
|
|
8,740
|
|
|
|
398
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
74,193
|
|
|
$
|
61,946
|
|
|
$
|
12,247
|
|
|
|
19.8
|
%
|
|
$
|
58,445
|
|
|
$
|
3,501
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary expense, commission and bonuses, employee benefits, net occupancy expense and other expense increased by $2.4 million, $1.9 million, $708,000, $793,000 and $1.6 million due to the Peoples merger, Horizon’s investments in growth markets and overall growth. Data processing and other expenses increased during 2015 from the cost of continued growth and expansion and the Peoples merger. Outside services and consultants increased primarily due to the fees associated with the Peoples acquisition. Loan expense increased in 2015 compared to 2014 due to company growth and collection costs. Other losses increased in 2015 compared to 2014 due to the recovery of a previously recorded loss contingency in 2014 and higher one-time losses in 2015.
Salaries increased during 2014 compared to 2013. These increases were primarily the result of changes to annual merit pay. In addition, salary expense, employee benefits, net occupancy expense and other expense was higher due to the Summit merger and Horizon’s investments in growth markets. Data processing and other expenses increased during 2014 from the cost of continued growth and expansion. Outside services and consultants increased due to $1.0 million in fees associated with the Summit acquisition. Loan expense increased in 2014 compared to 2013 due to collection costs. Commission and bonuses decreased due to lower commissions earned as a result of a decrease in mortgage loans originated. Other losses decreased in 2014 due to the recovery of a previously recorded loss contingency and higher one-time losses in 2013.
Income Taxes
Income tax expense for 2015 was $7.2 million, compared to $6.2 million of tax expense during 2014. The effective tax rate for 2015 was 26.0% compared to 25.4% in 2014 and 26.2% in 2013.
Use of Non-GAAP Financial Measures
Certain information set forth in this report on Form 10-K refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non-GAAP financial measures of the net interest income and net interest margin excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to the Summit acquisition. Horizon believes 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, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.
48
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-GAAP Reconciliation of Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Net Interest Margin As Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
20,222
|
|
|
$
|
19,776
|
|
|
$
|
16,523
|
|
|
$
|
74,734
|
|
|
$
|
62,983
|
|
Average interest-earning assets
|
|
|
2,369,301
|
|
|
|
2,304,515
|
|
|
|
1,865,750
|
|
|
|
2,166,006
|
|
|
|
1,794,263
|
|
Net interest income as a percent of average interest- earning assets (“Net Interest Margin”)
|
|
|
3.50
|
%
|
|
|
3.51
|
%
|
|
|
3.64
|
%
|
|
|
3.56
|
%
|
|
|
3.62
|
%
|
|
|
|
|
|
|
Impact of Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from acquisition-related purchase accounting adjustments
|
|
$
|
(695
|
)
|
|
$
|
(402
|
)
|
|
$
|
(719
|
)
|
|
$
|
(2,977
|
)
|
|
$
|
(2,745
|
)
|
|
|
|
|
|
|
Excluding Impact of Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
19,527
|
|
|
$
|
19,374
|
|
|
$
|
15,804
|
|
|
$
|
71,757
|
|
|
$
|
60,238
|
|
Average interest-earning assets
|
|
|
2,369,301
|
|
|
|
2,304,515
|
|
|
|
1,865,750
|
|
|
|
2,166,006
|
|
|
|
1,794,263
|
|
Core Net Interest Margin
|
|
|
3.38
|
%
|
|
|
3.44
|
%
|
|
|
3.49
|
%
|
|
|
3.42
|
%
|
|
|
3.47
|
%
|
Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Non-GAAP Reconciliation of Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
|
|
Merger expenses
|
|
|
4,889
|
|
|
|
1,335
|
|
|
|
—
|
|
Tax effect
|
|
|
(1,585
|
)
|
|
|
(467
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding merger expenses
|
|
|
23,853
|
|
|
|
18,969
|
|
|
|
19,876
|
|
|
|
|
|
Gain on sale of investment securities
|
|
|
(189
|
)
|
|
|
(988
|
)
|
|
|
(374
|
)
|
Tax effect
|
|
|
66
|
|
|
|
346
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding gain on sale of investment securities
|
|
|
23,730
|
|
|
|
18,327
|
|
|
|
19,633
|
|
|
|
|
|
Death benefit on bank owned life insurance (“BOLI”)
|
|
|
(145
|
)
|
|
|
—
|
|
|
|
—
|
|
Tax effect
|
|
|
51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding death benefit on BOLI
|
|
|
23,636
|
|
|
|
18,327
|
|
|
|
19,633
|
|
|
|
|
|
Acquisition-related purchase accounting adjustments (“PAUs”)
|
|
|
(2,977
|
)
|
|
|
(2,745
|
)
|
|
|
(6,294
|
)
|
Tax effect
|
|
|
1,042
|
|
|
|
961
|
|
|
|
2,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding PAUs
|
|
$
|
21,701
|
|
|
$
|
16,542
|
|
|
$
|
15,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Reconciliation of Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share as reported
|
|
$
|
1.89
|
|
|
$
|
1.90
|
|
|
$
|
2.17
|
|
Merger expenses
|
|
|
0.45
|
|
|
|
0.14
|
|
|
|
—
|
|
Tax effect
|
|
|
(0.15
|
)
|
|
|
(0.05
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share excluding merger expenses
|
|
|
2.20
|
|
|
|
1.99
|
|
|
|
2.17
|
|
|
|
|
|
Gain on sale of investment securities
|
|
|
(0.02
|
)
|
|
|
(0.10
|
)
|
|
|
(0.04
|
)
|
Tax effect
|
|
|
0.01
|
|
|
|
0.04
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding gain on sale of investment securities
|
|
|
2.19
|
|
|
|
1.92
|
|
|
|
2.14
|
|
|
|
|
|
Death benefit on BOLI
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
—
|
|
Tax effect
|
|
|
0.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding death benefit on BOLI
|
|
|
2.18
|
|
|
|
1.92
|
|
|
|
2.14
|
|
|
|
|
|
Acquisition-related PAUs
|
|
|
(0.28
|
)
|
|
|
(0.29
|
)
|
|
|
(0.70
|
)
|
Tax effect
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share excluding PAUs
|
|
$
|
2.00
|
|
|
$
|
1.74
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non- GAAP Allowance for Loan and Lease Loss Detail
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy
|
|
|
Heartland
|
|
|
Summit
|
|
|
Peoples
|
|
|
Total
|
|
Pre-discount loan balance
|
|
$
|
1,461,318
|
|
|
$
|
23,064
|
|
|
$
|
76,120
|
|
|
$
|
197,307
|
|
|
$
|
1,757,809
|
|
|
|
|
|
|
|
Allowance for loan losses (ALLL)
|
|
|
14,502
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,534
|
|
Loan discount
|
|
|
N/A
|
|
|
|
1,386
|
|
|
|
2,942
|
|
|
|
4,350
|
|
|
|
8,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL+loan discount
|
|
|
14,502
|
|
|
|
1,418
|
|
|
|
2,942
|
|
|
|
4,350
|
|
|
|
23,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,446,816
|
|
|
$
|
21,646
|
|
|
$
|
73,178
|
|
|
$
|
192,957
|
|
|
$
|
1,734,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL/ pre-discount loan balance
|
|
|
0.99
|
%
|
|
|
0.14
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.83
|
%
|
Loan discount/ pre-discount loan balance
|
|
|
N/A
|
|
|
|
6.01
|
%
|
|
|
3.86
|
%
|
|
|
2.20
|
%
|
|
|
0.49
|
%
|
ALLL+loan discount/ pre-discount loan balance
|
|
|
0.99
|
%
|
|
|
6.15
|
%
|
|
|
3.86
|
%
|
|
|
2.20
|
%
|
|
|
1.32
|
%
|
Liquidity and Rate Sensitivity Management
Management and the Board of Directors meet regularly to review both the liquidity and rate sensitivity position of Horizon. Effective asset and liability management ensures Horizon’s ability to monitor the cash flow requirements of depositors along with the demands of borrowers and to measure and manage interest rate risk. Horizon utilizes an interest rate risk assessment model designed to highlight sources of existing interest rate risk and consider the effect of these risks on strategic planning. Management maintains (within certain parameters) an essentially balanced ratio of interest sensitive assets to liabilities in order to protect against the effects of wide interest rate fluctuations.
Liquidity
The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the FHLB and the Federal Reserve Bank (“FRB”). At December 31, 2015, Horizon had available approximately $253.2 million in available credit from various money center banks, including the FHLB and the FRB Discount Window. Factors which could impact Horizon’s funding needs in the future include:
|
•
|
|
Horizon had outstanding borrowings of over $160.9 million with the FHLB and total borrowing capacity with the FHLB of $324.8 million. Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources, making it less expensive to borrow money from the FHLB. Financial difficulties at the FHLB could reduce or eliminate Horizon’s additional borrowing capacity with the FHLB or FHLB could change collateral requirements, which could lower the Company’s borrowing availability.
|
|
•
|
|
If residential mortgage loan rates remain low, Horizon’s mortgage warehouse loans could create an additional need for funding.
|
|
•
|
|
Horizon had a total of $135.0 million of Federal Fund lines from various money center banks. These are uncommitted lines and could be withdrawn at any time by the correspondent banks.
|
|
•
|
|
Horizon had a total of $89.2 million of available collateral at the FRB secured by municipal securities. These securities may mature, call, or be sold, which would reduce the available collateral.
|
|
•
|
|
A downgrade in Horizon’s ability to obtain credit due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition.
|
|
•
|
|
An act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund, hedge fund or a government agency.
|
|
•
|
|
Market speculation or rumors about Horizon or the banking industry in general may adversely affect the cost and availability of normal funding sources.
|
50
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
If any of these events occur, they could force Horizon to borrow money from other sources including negotiable certificates of deposit. Such other monies may only be available at higher interest rates and on less advantageous terms, which will impact our net income and could impact our ability to grow. Management believes Horizon has adequate funding sources to meet short and long term needs.
Horizon maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period.
During 2015, cash flows were generated primarily from the sales, maturities, and prepayments of investment securities of $128.9 million and an increase in deposits and borrowings of $46.7 million and $49.4 million, respectively. Cash flows were used to purchase investments totaling $244.2 million and increase loans by $145.2 million. The net cash and cash equivalent position increased by $5.2 million during 2015.
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2015. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Within
one year
|
|
|
After one
but within
three years
|
|
|
After three
but within
five years
|
|
|
After
five
years
|
|
Remaining contractual maturities of time deposits
|
|
$
|
366,547
|
|
|
$
|
167,791
|
|
|
$
|
125,206
|
|
|
$
|
56,878
|
|
|
$
|
16,672
|
|
Borrowings
|
|
|
449,347
|
|
|
|
298,235
|
|
|
|
77,489
|
|
|
|
68,375
|
|
|
|
5,248
|
|
Subordinated debentures
|
|
|
32,797
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,797
|
|
Loan Commitments
|
|
|
468,803
|
|
|
|
91,450
|
|
|
|
377,353
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stock
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Letters of credit
|
|
|
3,564
|
|
|
|
619
|
|
|
|
2,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,333,558
|
|
|
$
|
570,595
|
|
|
$
|
582,993
|
|
|
$
|
125,253
|
|
|
$
|
54,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity
The degree by which net interest income may fluctuate due to changes in interest rates is monitored by Horizon using computer simulation models, incorporating not only the current GAP position but the effect of expected repricing of specific financial assets and liabilities. When repricing opportunities are not properly aligned, net interest income may be affected when interest rates change. Forecasting results of the possible outcomes determines the exposure to interest rate risk inherent in Horizon’s balance sheet. The goal is to manage imbalanced positions that arise when the total amount of assets that reprice or mature in a given time period differs significantly from liabilities that reprice or mature in the same time period. The theory behind managing the difference between repricing assets and liabilities is to have more assets repricing in a rising rate environment and more liabilities repricing in a declining rate environment. Based on a model that assumes a lag in repricing, at December 31, 2015, the amount of assets that reprice within one year was 209% of liabilities that reprice within one year. At December 31, 2014, this same model reported that the amount of assets that reprice within one year was approximately 226% of the amount of liabilities that reprice within the same time period. The year 2015 was a stable rate environment and the yields on assets continued to reprice at lower rates due to current asset pricing and a more competitive environment. The impact of lower yields offset partially by slightly lower funding costs negatively impacted the net interest margin during 2015.
51
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitivity
|
|
|
|
3 Months
or Less
|
|
|
> 3 Months
& < 6
Months
|
|
|
> 6 Months
& < 1 Year
|
|
|
Greater
Than 1
Year
|
|
|
Total
|
|
Loans
|
|
$
|
712,657
|
|
|
$
|
135,568
|
|
|
$
|
197,497
|
|
|
$
|
711,326
|
|
|
$
|
1,757,048
|
|
Federal Funds Sold
|
|
|
958
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
958
|
|
Interest-Bearing balances with Banks
|
|
|
14,289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,289
|
|
Investment securities and FRB and
|
|
|
33,137
|
|
|
|
20,062
|
|
|
|
37,171
|
|
|
|
556,064
|
|
|
|
646,434
|
|
FHLB stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
233,672
|
|
|
|
233,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
761,041
|
|
|
$
|
155,630
|
|
|
$
|
234,668
|
|
|
$
|
1,501,062
|
|
|
$
|
2,652,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
9,801
|
|
|
$
|
9,801
|
|
|
$
|
19,603
|
|
|
$
|
296,750
|
|
|
$
|
335,955
|
|
Interest-bearing deposits
|
|
|
72,029
|
|
|
|
74,495
|
|
|
|
124,247
|
|
|
|
1,273,427
|
|
|
|
1,544,198
|
|
Borrowed Funds
|
|
|
138,496
|
|
|
|
74,249
|
|
|
|
29,979
|
|
|
|
239,420
|
|
|
|
482,144
|
|
Other Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,272
|
|
|
|
23,272
|
|
Stockholders’ equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
266,832
|
|
|
|
266,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholder’s equity
|
|
$
|
220,326
|
|
|
$
|
158,545
|
|
|
$
|
173,829
|
|
|
$
|
2,099,701
|
|
|
$
|
2,652,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP
|
|
$
|
540,715
|
|
|
$
|
(2,915
|
)
|
|
$
|
60,839
|
|
|
$
|
(598,639
|
)
|
|
|
|
|
Cumulative GAP
|
|
$
|
540,715
|
|
|
$
|
537,800
|
|
|
$
|
598,639
|
|
|
|
|
|
|
|
|
|
Quantitative and Qualitative Disclosures about Market Risk
Horizon’s primary market risk exposure is interest rate risk. Interest rate risk (“IRR”) is the risk that Horizon’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR.
Horizon’s exposure to interest rate risk arises from repricing or mismatch risk, embedded options risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect Horizon’s assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon’s objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position, including the sale of mortgage loans on the secondary market, hedging certain balance sheet items using derivatives, varying maturities of FHLB advances, certificates of deposit funding and investment securities.
The table which follows provides information about Horizon’s financial instruments that were sensitive to changes in interest rates as of December 31, 2015. The table incorporates Horizon’s internal system generated data related to the maturity and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage-backed securities. From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments. For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon’s experience and management’s judgment concerning the most likely withdrawal behaviors.
52
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
|
December 31
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
& Beyond
|
|
|
Total
|
|
|
2015
|
|
Rate-sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate loans
|
|
$
|
380,994
|
|
|
$
|
165,782
|
|
|
$
|
104,552
|
|
|
$
|
63,470
|
|
|
$
|
34,426
|
|
|
$
|
55,740
|
|
|
$
|
804,964
|
|
|
$
|
729,046
|
|
Average interest rate
|
|
|
4.53
|
%
|
|
|
4.62
|
%
|
|
|
4.57
|
%
|
|
|
4.55
|
%
|
|
|
4.55
|
%
|
|
|
4.46
|
%
|
|
|
4.55
|
%
|
|
|
|
|
Variable interest rate loans
|
|
|
673,135
|
|
|
|
60,297
|
|
|
|
50,855
|
|
|
|
41,836
|
|
|
|
35,430
|
|
|
|
90,531
|
|
|
|
952,084
|
|
|
|
1,097,849
|
|
Average interest rate
|
|
|
3.91
|
%
|
|
|
4.17
|
%
|
|
|
4.21
|
%
|
|
|
4.16
|
%
|
|
|
4.08
|
%
|
|
|
3.64
|
%
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,054,129
|
|
|
|
226,079
|
|
|
|
155,407
|
|
|
|
105,306
|
|
|
|
69,856
|
|
|
|
146,271
|
|
|
|
1,757,048
|
|
|
|
1,826,895
|
|
Average interest rate
|
|
|
4.13
|
%
|
|
|
4.50
|
%
|
|
|
4.45
|
%
|
|
|
4.40
|
%
|
|
|
4.31
|
%
|
|
|
3.95
|
%
|
|
|
4.22
|
%
|
|
|
|
|
Securities, including FRB and FHLB stock
|
|
|
90,370
|
|
|
|
67,900
|
|
|
|
60,752
|
|
|
|
55,210
|
|
|
|
65,134
|
|
|
|
307,068
|
|
|
|
646,434
|
|
|
|
650,571
|
|
Average interest rate
|
|
|
2.80
|
%
|
|
|
2.90
|
%
|
|
|
2.97
|
%
|
|
|
3.00
|
%
|
|
|
3.58
|
%
|
|
|
3.88
|
%
|
|
|
3.44
|
%
|
|
|
|
|
Other interest-bearing assets
|
|
|
15,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,247
|
|
|
|
15,247
|
|
Average interest rate
|
|
|
1.32
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
1.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings assets
|
|
$
|
1,159,746
|
|
|
$
|
293,979
|
|
|
$
|
216,159
|
|
|
$
|
160,516
|
|
|
$
|
134,990
|
|
|
$
|
453,339
|
|
|
$
|
2,418,729
|
|
|
$
|
2,492,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate
|
|
|
3.99
|
%
|
|
|
4.13
|
%
|
|
|
4.04
|
%
|
|
|
3.91
|
%
|
|
|
4.13
|
%
|
|
|
3.91
|
%
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate-sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
39,206
|
|
|
$
|
34,631
|
|
|
$
|
30,589
|
|
|
$
|
27,019
|
|
|
$
|
23,866
|
|
|
$
|
180,643
|
|
|
$
|
335,955
|
|
|
$
|
335,955
|
|
NOW accounts
|
|
|
32,615
|
|
|
|
30,058
|
|
|
|
27,701
|
|
|
|
25,530
|
|
|
|
23,528
|
|
|
|
276,574
|
|
|
|
416,007
|
|
|
|
388,641
|
|
Average interest rate
|
|
|
0.08
|
%
|
|
|
0.07
|
%
|
|
|
0.07
|
%
|
|
|
0.07
|
%
|
|
|
0.08
|
%
|
|
|
0.07
|
%
|
|
|
0.07
|
%
|
|
|
|
|
Savings and money market accounts
|
|
|
70,365
|
|
|
|
63,643
|
|
|
|
57,586
|
|
|
|
52,125
|
|
|
|
47,200
|
|
|
|
470,727
|
|
|
|
761,645
|
|
|
|
706,015
|
|
Average interest rate
|
|
|
0.17
|
%
|
|
|
0.17
|
%
|
|
|
0.17
|
%
|
|
|
0.17
|
%
|
|
|
0.17
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
|
|
|
|
Certificates of deposit
|
|
|
167,791
|
|
|
|
83,534
|
|
|
|
41,672
|
|
|
|
32,038
|
|
|
|
24,840
|
|
|
|
16,672
|
|
|
|
366,547
|
|
|
|
366,659
|
|
Average interest rate
|
|
|
0.91
|
%
|
|
|
1.44
|
%
|
|
|
1.51
|
%
|
|
|
1.70
|
%
|
|
|
1.58
|
%
|
|
|
1.62
|
%
|
|
|
1.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
309,976
|
|
|
|
211,866
|
|
|
|
157,549
|
|
|
|
136,712
|
|
|
|
119,434
|
|
|
|
944,617
|
|
|
|
1,880,153
|
|
|
|
1,797,269
|
|
Average interest rate
|
|
|
0.54
|
%
|
|
|
0.63
|
%
|
|
|
0.47
|
%
|
|
|
0.48
|
%
|
|
|
0.41
|
%
|
|
|
0.13
|
%
|
|
|
0.32
|
%
|
|
|
|
|
Fixed interest rate borrowings
|
|
|
236,358
|
|
|
|
47,415
|
|
|
|
21,186
|
|
|
|
57,408
|
|
|
|
16,071
|
|
|
|
11,512
|
|
|
|
389,950
|
|
|
|
389,191
|
|
Average interest rate
|
|
|
0.56
|
%
|
|
|
3.83
|
%
|
|
|
1.18
|
%
|
|
|
3.12
|
%
|
|
|
2.15
|
%
|
|
|
2.61
|
%
|
|
|
1.49
|
%
|
|
|
|
|
Variable interest rate borrowings
|
|
|
92,194
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
92,194
|
|
|
|
85,352
|
|
Average interest rate
|
|
|
2.26
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
2.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds
|
|
$
|
638,529
|
|
|
$
|
259,281
|
|
|
$
|
178,734
|
|
|
$
|
194,120
|
|
|
$
|
135,505
|
|
|
$
|
956,129
|
|
|
$
|
2,362,298
|
|
|
$
|
2,271,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate
|
|
|
0.80
|
%
|
|
|
1.21
|
%
|
|
|
0.56
|
%
|
|
|
1.26
|
%
|
|
|
0.62
|
%
|
|
|
0.16
|
%
|
|
|
0.59
|
%
|
|
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this item is incorporated by reference to the information appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.
53
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Financial Statements
Table of Contents
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
Balance Sheets
|
|
|
55
|
|
|
|
Statements of Income
|
|
|
56
|
|
|
|
Statements of Comprehensive Income
|
|
|
57
|
|
|
|
Statements of Stockholders’ Equity
|
|
|
58
|
|
|
|
Statements of Cash Flows
|
|
|
59
|
|
|
|
Notes to Financial Statements
|
|
|
60
|
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
112
|
|
|
|
Other Information
|
|
|
|
|
|
|
Management’s Report on Financial Statements
|
|
|
115
|
|
|
|
Summary of Selected Financial Data
|
|
|
116
|
|
|
|
Horizon’s Common Stock and Related Stockholders’ Matters
|
|
|
117
|
|
54
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
48,650
|
|
|
$
|
43,476
|
|
Investment securities, available for sale
|
|
|
444,982
|
|
|
|
323,764
|
|
Investment securities, held to maturity (fair value of $193,703 and $169,904)
|
|
|
187,629
|
|
|
|
165,767
|
|
Loans held for sale
|
|
|
7,917
|
|
|
|
6,143
|
|
Loans, net of allowance for loan losses of $14,534 and $16,501
|
|
|
1,734,597
|
|
|
|
1,362,053
|
|
Premises and equipment, net
|
|
|
60,798
|
|
|
|
52,461
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
13,823
|
|
|
|
11,348
|
|
Goodwill
|
|
|
49,600
|
|
|
|
28,176
|
|
Other intangible assets
|
|
|
7,371
|
|
|
|
3,965
|
|
Interest receivable
|
|
|
10,535
|
|
|
|
8,246
|
|
Cash value of life insurance
|
|
|
54,504
|
|
|
|
39,382
|
|
Other assets
|
|
|
31,995
|
|
|
|
32,141
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,652,401
|
|
|
$
|
2,076,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
335,955
|
|
|
$
|
267,667
|
|
Interest bearing
|
|
|
1,544,198
|
|
|
|
1,214,652
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,880,153
|
|
|
|
1,482,319
|
|
Borrowings
|
|
|
449,347
|
|
|
|
351,198
|
|
Subordinated debentures
|
|
|
32,797
|
|
|
|
32,642
|
|
Interest payable
|
|
|
507
|
|
|
|
497
|
|
Other liabilities
|
|
|
22,765
|
|
|
|
15,852
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,385,569
|
|
|
|
1,882,508
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 12,500 shares
|
|
|
12,500
|
|
|
|
12,500
|
|
Common stock, no par value Authorized, 22,500,000 shares Issued, 11,995,324 and 9,278,916 shares Outstanding, 11,939,887 and 9,213,036 shares
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
106,370
|
|
|
|
45,916
|
|
Retained earnings
|
|
|
148,685
|
|
|
|
134,477
|
|
Accumulated other comprehensive income (loss)
|
|
|
(723
|
)
|
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
266,832
|
|
|
|
194,414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,652,401
|
|
|
$
|
2,076,922
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
55
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
75,373
|
|
|
$
|
62,435
|
|
|
$
|
62,229
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
8,721
|
|
|
|
9,344
|
|
|
|
8,441
|
|
Tax exempt
|
|
|
4,494
|
|
|
|
4,426
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
88,588
|
|
|
|
76,205
|
|
|
|
74,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,559
|
|
|
|
5,257
|
|
|
|
5,672
|
|
Borrowed funds
|
|
|
6,286
|
|
|
|
5,956
|
|
|
|
5,821
|
|
Subordinated debentures
|
|
|
2,009
|
|
|
|
2,009
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
13,854
|
|
|
|
13,222
|
|
|
|
13,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
74,734
|
|
|
|
62,983
|
|
|
|
61,383
|
|
Provision for loan losses
|
|
|
3,162
|
|
|
|
3,058
|
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income after Provision for Loan Losses
|
|
|
71,572
|
|
|
|
59,925
|
|
|
|
59,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
4,807
|
|
|
|
4,085
|
|
|
|
3,989
|
|
Wire transfer fees
|
|
|
633
|
|
|
|
557
|
|
|
|
697
|
|
Interchange fees
|
|
|
5,591
|
|
|
|
4,649
|
|
|
|
4,056
|
|
Fiduciary activities
|
|
|
5,637
|
|
|
|
4,738
|
|
|
|
4,337
|
|
Gain on sale of investment securities (includes $189, $988 and $374 for the years ended December 31, 2015, 2014 and 2013 related to accumulated other comprehensive earnings reclassifications)
|
|
|
189
|
|
|
|
988
|
|
|
|
374
|
|
Gain on sale of mortgage loans
|
|
|
10,055
|
|
|
|
8,395
|
|
|
|
8,794
|
|
Mortgage servicing income net of impairment
|
|
|
993
|
|
|
|
805
|
|
|
|
1,521
|
|
Increase in cash value of bank owned life insurance
|
|
|
1,249
|
|
|
|
1,047
|
|
|
|
1,035
|
|
Death benefit on bank owned life insurance
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
Other income
|
|
|
1,103
|
|
|
|
1,013
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
30,402
|
|
|
|
26,277
|
|
|
|
25,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
37,712
|
|
|
|
32,682
|
|
|
|
31,032
|
|
Net occupancy expenses
|
|
|
6,400
|
|
|
|
5,607
|
|
|
|
4,984
|
|
Data processing
|
|
|
4,251
|
|
|
|
3,663
|
|
|
|
3,045
|
|
Professional fees
|
|
|
2,070
|
|
|
|
1,731
|
|
|
|
1,668
|
|
Outside services and consultants
|
|
|
5,735
|
|
|
|
3,250
|
|
|
|
2,412
|
|
Loan expense
|
|
|
5,379
|
|
|
|
4,770
|
|
|
|
4,668
|
|
FDIC insurance expense
|
|
|
1,499
|
|
|
|
1,175
|
|
|
|
1,089
|
|
Other losses
|
|
|
432
|
|
|
|
(70
|
)
|
|
|
807
|
|
Other expense
|
|
|
10,715
|
|
|
|
9,138
|
|
|
|
8,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
74,193
|
|
|
|
61,946
|
|
|
|
58,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
|
|
27,781
|
|
|
|
24,256
|
|
|
|
26,924
|
|
|
|
|
|
Income tax expense (includes $66, $346 and $131 for the years ended December 31, 2015, 2014 and 2013 related to income tax expense from reclassification items)
|
|
|
7,232
|
|
|
|
6,155
|
|
|
|
7,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
20,549
|
|
|
|
18,101
|
|
|
|
19,876
|
|
Preferred stock dividend
|
|
|
(125
|
)
|
|
|
(133
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
20,424
|
|
|
$
|
17,968
|
|
|
$
|
19,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
1.94
|
|
|
$
|
1.98
|
|
|
$
|
2.26
|
|
Diluted Earnings Per Share
|
|
|
1.89
|
|
|
|
1.90
|
|
|
|
2.17
|
|
See notes to consolidated financial statements
56
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
Net Income
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments for the period
|
|
|
195
|
|
|
|
(511
|
)
|
|
|
2,668
|
|
Income tax effect
|
|
|
(68
|
)
|
|
|
179
|
|
|
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes from derivative instruments
|
|
|
127
|
|
|
|
(332
|
)
|
|
|
1,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) for the period on AFS securities
|
|
|
(2,910
|
)
|
|
|
4,841
|
|
|
|
(18,956
|
)
|
Unrealized depreciation for the period on held-to-maturity securities
|
|
|
(549
|
)
|
|
|
1,658
|
|
|
|
—
|
|
Reclassification adjustment for securities gains realized in income
|
|
|
(189
|
)
|
|
|
(988
|
)
|
|
|
(374
|
)
|
Income tax effect
|
|
|
1,277
|
|
|
|
(1,929
|
)
|
|
|
6,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities
|
|
|
(2,371
|
)
|
|
|
3,582
|
|
|
|
(12,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax
|
|
|
(2,244
|
)
|
|
|
3,250
|
|
|
|
(10,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
18,305
|
|
|
$
|
21,351
|
|
|
$
|
9,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
57
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollar Amounts in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
Balances, January 1, 2013
|
|
$
|
12,500
|
|
|
$
|
31,965
|
|
|
$
|
105,402
|
|
|
$
|
9,101
|
|
|
$
|
158,968
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
19,876
|
|
|
|
|
|
|
|
19,876
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,830
|
)
|
|
|
(10,830
|
)
|
Amortization of unearned compensation
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
Exercise of stock options
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
Stock option expense
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Cash dividends on preferred stock (2.96%)
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
(370
|
)
|
Cash dividends on common stock ($.42 per share)
|
|
|
|
|
|
|
|
|
|
|
(3,655
|
)
|
|
|
|
|
|
|
(3,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2013
|
|
$
|
12,500
|
|
|
$
|
32,496
|
|
|
$
|
121,253
|
|
|
$
|
(1,729
|
)
|
|
$
|
164,520
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
18,101
|
|
|
|
|
|
|
|
18,101
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,250
|
|
|
|
3,250
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
363
|
|
Exercise of stock options
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Stock option expense
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Stock issued from acquisition
|
|
|
|
|
|
|
12,689
|
|
|
|
|
|
|
|
|
|
|
|
12,689
|
|
Cash dividends on preferred stock (1.06%)
|
|
|
|
|
|
|
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
(133
|
)
|
Cash dividends on common stock ($.51 per share)
|
|
|
|
|
|
|
|
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2014
|
|
$
|
12,500
|
|
|
$
|
45,916
|
|
|
$
|
134,477
|
|
|
$
|
1,521
|
|
|
$
|
194,414
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
20,549
|
|
|
|
|
|
|
|
20,549
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,244
|
)
|
|
|
(2,244
|
)
|
Amortization of unearned compensation
|
|
|
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
355
|
|
Exercise of stock options
|
|
|
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Exercise of stock warrants
|
|
|
|
|
|
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
3,751
|
|
Tax benefit related to stock options
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
Stock option expense
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
Stock issued from acquisition
|
|
|
|
|
|
|
55,506
|
|
|
|
|
|
|
|
|
|
|
|
55,506
|
|
Cash dividends on preferred stock (1.00%)
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
(125
|
)
|
Cash dividends on common stock ($.58 per share)
|
|
|
|
|
|
|
|
|
|
|
(6,216
|
)
|
|
|
|
|
|
|
(6,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
|
$
|
12,500
|
|
|
$
|
106,370
|
|
|
$
|
148,685
|
|
|
$
|
(723
|
)
|
|
$
|
266,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
58
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
3,162
|
|
|
|
3,058
|
|
|
|
1,920
|
|
Depreciation and amortization
|
|
|
4,152
|
|
|
|
3,779
|
|
|
|
3,356
|
|
Share based compensation
|
|
|
288
|
|
|
|
203
|
|
|
|
48
|
|
Mortgage servicing rights net (recovery) impairment
|
|
|
59
|
|
|
|
(51
|
)
|
|
|
(635
|
)
|
Premium amortization on securities available for sale, net
|
|
|
3,420
|
|
|
|
2,299
|
|
|
|
2,861
|
|
Gain on sale of investment securities
|
|
|
(189
|
)
|
|
|
(988
|
)
|
|
|
(374
|
)
|
Gain on sale of mortgage loans
|
|
|
(10,055
|
)
|
|
|
(8,395
|
)
|
|
|
(8,794
|
)
|
Proceeds from sales of loans
|
|
|
310,700
|
|
|
|
234,776
|
|
|
|
365,654
|
|
Loans originated for sale
|
|
|
(302,419
|
)
|
|
|
(229,243
|
)
|
|
|
(346,397
|
)
|
Change in cash value of life insurance
|
|
|
(1,224
|
)
|
|
|
(1,007
|
)
|
|
|
(998
|
)
|
Gain on sale of other real estate owned
|
|
|
(289
|
)
|
|
|
(186
|
)
|
|
|
(116
|
)
|
Net change in
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(1,010
|
)
|
|
|
(398
|
)
|
|
|
215
|
|
Interest payable
|
|
|
(11
|
)
|
|
|
(50
|
)
|
|
|
(54
|
)
|
Other assets
|
|
|
8,569
|
|
|
|
(4,945
|
)
|
|
|
9,905
|
|
Other liabilities
|
|
|
(472
|
)
|
|
|
712
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
35,230
|
|
|
|
17,665
|
|
|
|
46,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
(244,195
|
)
|
|
|
(93,375
|
)
|
|
|
(168,886
|
)
|
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale
|
|
|
121,724
|
|
|
|
117,533
|
|
|
|
121,309
|
|
Purchases of securities held to maturity
|
|
|
(32,605
|
)
|
|
|
(4,839
|
)
|
|
|
(12,050
|
)
|
Proceeds from maturities of securities held to maturity
|
|
|
7,155
|
|
|
|
13,851
|
|
|
|
2,110
|
|
Purchase of Federal Reserve Bank stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(851
|
)
|
Proceeds from the sale of FHLB stock
|
|
|
268
|
|
|
|
4,972
|
|
|
|
—
|
|
Net change in loans
|
|
|
(156,340
|
)
|
|
|
(190,838
|
)
|
|
|
112,140
|
|
Proceeds on the sale of OREO and repossessed assets
|
|
|
3,014
|
|
|
|
2,726
|
|
|
|
2,343
|
|
Change in premises and equipment, net
|
|
|
(5,622
|
)
|
|
|
(6,255
|
)
|
|
|
(6,318
|
)
|
Acquisition of SCB, net of cash received
|
|
|
—
|
|
|
|
7,914
|
|
|
|
—
|
|
Acquisition of Peoples, net of cash received
|
|
|
182,413
|
|
|
|
—
|
|
|
|
—
|
|
Purchase of Mortgage Company
|
|
|
—
|
|
|
|
(735
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(124,188
|
)
|
|
|
(149,046
|
)
|
|
|
49,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
46,747
|
|
|
|
69,780
|
|
|
|
(2,633
|
)
|
Borrowings
|
|
|
49,421
|
|
|
|
78,068
|
|
|
|
(89,313
|
)
|
Proceeds from issuance of stock
|
|
|
4,305
|
|
|
|
165
|
|
|
|
195
|
|
Dividends paid on common shares
|
|
|
(6,216
|
)
|
|
|
(4,744
|
)
|
|
|
(3,655
|
)
|
Dividends paid on preferred shares
|
|
|
(125
|
)
|
|
|
(133
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
94,132
|
|
|
|
143,136
|
|
|
|
(95,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
5,174
|
|
|
|
11,755
|
|
|
|
986
|
|
Cash and Cash Equivalents, Beginning of Period
|
|
|
43,476
|
|
|
|
31,721
|
|
|
|
30,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$
|
48,650
|
|
|
$
|
43,476
|
|
|
$
|
31,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
13,844
|
|
|
$
|
13,230
|
|
|
$
|
13,556
|
|
Income taxes paid
|
|
|
4,123
|
|
|
|
2,800
|
|
|
|
3,100
|
|
Transfer of loans to other real estate owned
|
|
|
5,567
|
|
|
|
3,905
|
|
|
|
3,284
|
|
Transfer of available-for-sale securities to held-to-maturity
|
|
|
—
|
|
|
|
167,047
|
|
|
|
—
|
|
The Company purchased all of the capital stock of Peoples for $78,147 on July 1, 2015 and of Summit for $18,896 on April 3, 2014. In conjunction with the acquisition, liabilities were assumed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
485,077
|
|
|
|
158,585
|
|
|
|
—
|
|
Cash paid to retire debt
|
|
|
—
|
|
|
|
1,029
|
|
|
|
—
|
|
Less: common stock issued
|
|
|
55,506
|
|
|
|
12,689
|
|
|
|
—
|
|
Cash paid for the capital stock
|
|
|
22,641
|
|
|
|
6,207
|
|
|
|
—
|
|
Liabilities assumed
|
|
|
406,930
|
|
|
|
138,660
|
|
|
|
|
|
See notes to consolidated financial statements
59
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Business
— The consolidated financial statements of Horizon Bancorp (“Horizon”) and its wholly owned subsidiaries, Horizon Bank, N.A. (“Bank”) and Horizon Risk Management, Inc., together referred to as “Horizon” conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly owned subsidiary of Horizon.
The Bank is a full-service commercial bank offering a broad range of commercial and retail banking and other services incident to banking along with a trust department that offers corporate and individual trust and agency services and investment management services. The Bank maintains 46 full service offices. The Bank has wholly owned direct and indirect subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Properties, Inc. (“Horizon Properties”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Investments manages the investment portfolio of the Bank. Horizon Properties manages the real estate investment trust. Horizon Insurance is used by the Company’s Wealth Management to sell certain insurance products. Horizon Grantor Trust holds title to certain company owned life insurance policies. Horizon conducts no business except that incident to its ownership of the subsidiaries.
Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the following acquisitions: Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”); American Trust & Savings Bank in 2010, which formed Am Tru Statutory Trust I (“Am Tru Trust”); and Heartland Bancshares, Inc. in 2013, which formed Heartland (IN) Statutory Trust II (“Heartland Trust”). See Note 15 of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree.
Basis of Reporting
— The consolidated financial statements include the accounts of Horizon and subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of other real estate owned, goodwill and intangible assets, mortgage servicing rights, other-than-temporary impairments and fair values of financial instruments.
Fair Value Measurements
— Horizon uses fair value measurements to record fair value adjustments, to certain assets, and liabilities and to determine fair value disclosures. Horizon has adopted Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures for all applicable financial and nonfinancial assets and liabilities. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.
As defined in codification, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. Horizon values its assets and liabilities in the principal market where it sells the particular asset or
60
Table of Contents
H
ORIZON
B
ANCORP
AND
S
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).
In measuring the fair value of an asset, Horizon assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset.
When measuring the fair value of a liability, Horizon assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only Horizon’s own credit risk (i.e., the risk that Horizon will fail to meet its obligation), but also other risks such as settlement risk. Horizon considers the effect of its own credit risk on the fair value for any period in which fair value is measured.
There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of Horizon. Unobservable inputs are assumptions based on Horizon’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability.
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.
Investment Securities Available for Sale
— Horizon designates the majority of its investment portfolio as available for sale based on management’s plans to use such securities for asset and liability management, liquidity and not to hold such securities as long-term investments. Management repositions the portfolio to take advantage of future expected interest rate trends when Horizon’s long-term profitability can be enhanced. Investment securities available for sale and marketable equity securities are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method.
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Investment Securities Held to Maturity
— Includes any security for which Horizon has the positive intent and ability to hold until maturity. These securities are carried at amortized cost.
Loans Held for Sale
— Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Interest and Fees on Loans
— Interest on commercial, mortgage and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured or in the process of collection, or when serious doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments.
Concentrations of Credit Risk
— The Bank grants commercial, real estate, and consumer loans to customers located primarily in Northern and Central Indiana and Southwest and Central Michigan and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 46% of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flows from operations of the businesses. The Bank does not have a concentration in speculative commercial real estate loans. Residential real estate loans make up approximately 25% of the loan portfolio and are secured by residential real estate. Installment loans make up approximately 20% of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 8% of the loan portfolio and are secured by residential real estate.
Mortgage Warehouse Loans
— Horizon’s mortgage warehousing has specific mortgage companies as customers of the Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement.
The transaction does not qualify as a sale under ASC 860, Transfers and Servicing and therefore is accounted for as a secured borrowing with pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no costs are deferred due to the term between each loan funding and related payoff, 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 sales 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.
Allowance for Loan Losses
— An allowance for loan losses is maintained to absorb probable incurred losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. Horizon’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the general allowance, specific allowances for identified problem loans and the qualitative allowance.
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The general allowance is calculated by applying loss factors to pools of outstanding loans. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified conditions or circumstances related to a credit that management believes indicate the probability that a loss will be incurred in excess of the amount determined by the application of the formula allowance.
The qualitative allowance is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the general and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the qualitative allowance may include factors such as local, regional and national economic conditions and forecasts, concentrations of credit and changes in the composition of the portfolio.
Loan Impairment
— When analysis determines a borrower’s operating results and financial condition are not adequate to meet 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 placed on non-accrual status when 90 days or more past due. These loans are also often considered impaired. Impaired loans or portions thereof, are charged-off when deemed uncollectible. This typically occurs when the loan is 90 or more days past due.
Loans are considered impaired if the borrower does not exhibit the ability to pay or the full principal or interest payments are not expected or made in accordance with the original terms of the loan. Impaired loans are measured and carried at the lower of cost or the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.
Smaller balance homogenous loans are evaluated for impairment in the aggregate. Such loans include residential first mortgage loans secured by one to four family residences, residential construction loans and automobile, home equity and second mortgages. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment.
Loans Acquired in Business Combinations
— Loans acquired in business combinations 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 purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loans to value percentages. Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (FASB ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Accordingly, allowances for credit losses related to these loans are not carried over and recorded at the acquisition dates. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC 310-30, but for which a discount is attributable, at least in part to the credit quality, are also accounted for under this guidance. As a result, related discounts are recognized subsequently through accretion based on the expected cash flows of the acquired loans. For purposes of applying FASB ASC 310-30, loans acquired in business combinations are aggregated into pools of loans with common risk characteristics.
The expected cash flows of the acquired loan pools in excess of the fair values recorded is referred to as the accretable yield and is recognized in interest income over the remaining estimated lives of the loan pools. The Company continues to evaluate the fair value of the loans including cash flows expected to be collected. Increases in the Company’s cash flow expectation are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses.
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(Table dollars in thousands except for per share data)
Premises and Equipment
— Buildings and major improvements are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and equipment are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.
Federal Reserve and Federal Home Loan Bank of Indianapolis (FHLBI) Stock
— The stock is a required investment for institutions that are members of the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) systems. The required investment in the common stock is based on a predetermined formula.
Mortgage Servicing Rights
—Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. Amortized mortgage servicing rights include commercial mortgage servicing rights. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.
Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with mortgage servicing income net of impairment on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Intangible Assets
— Goodwill is tested annually for impairment. At December 31, 2015, Horizon had core deposit intangibles of $7.4 million subject to amortization and $49.6 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. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Goodwill totaled $49.6 million at December 31, 2015 and $28.2 million at December 31, 2014. A large majority of the goodwill relates to the acquisitions of Heartland, Summit and Peoples.
Bank Owned Life Insurance (BOLI)
– BOLI has been purchased on certain employees and directors of the Company. The Company records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.
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Income Taxes
—The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740,
Income Taxes
). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries.
Trust Assets and Income
— Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon.
Transfer of Financial Assets
—The transfer of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Earnings per Common Share
— Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.
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(Table dollars in thousands except for per share data)
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|
|
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|
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|
Years Ended December 31
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2015
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|
|
2014
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|
|
2013
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|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
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|
Less: Preferred stock dividends
|
|
|
125
|
|
|
|
133
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
20,424
|
|
|
$
|
17,968
|
|
|
$
|
19,506
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,510,296
|
|
|
|
9,060,702
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|
|
|
8,619,330
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|
|
|
|
|
Basic earnings per share
|
|
$
|
1.94
|
|
|
$
|
1.98
|
|
|
$
|
2.26
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|
|
|
|
|
|
|
|
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|
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|
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|
|
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Diluted earnings per share
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|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
20,424
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|
|
$
|
17,968
|
|
|
$
|
19,506
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,510,296
|
|
|
|
9,060,702
|
|
|
|
8,619,330
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|
Effect of dilutive securities:
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|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
220,316
|
|
|
|
315,679
|
|
|
|
303,970
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|
Restricted stock
|
|
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32,010
|
|
|
|
39,476
|
|
|
|
40,160
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|
Stock options
|
|
|
35,586
|
|
|
|
38,268
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|
|
|
37,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
10,798,208
|
|
|
|
9,454,125
|
|
|
|
9,000,963
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.89
|
|
|
$
|
1.90
|
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015 and 2014 there were 2,500 shares and at December 31, 2013 there were zero shares that were not included in the computation of diluted earnings per share because they were non-dilutive.
Dividend Restrictions
— Regulations of the OCC limit the amount of dividends that may be paid by a national bank to its parent holding company without prior approval of the OCC. At December 31, 2015, $12.7 million was available for payment of dividends from the Bank to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines.
Consolidated Statements of Cash Flows
— For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and federal funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan transactions, deposit transactions, short-term investments and borrowings.
Comprehensive Income
— Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized and realized gains and losses in derivative financial instruments and amortization of available-for-sale securities transferred to held-to-maturity.
Share-Based Compensation
— At December 31, 2015, Horizon has share-based compensation plans, which are described more fully in Note 22. All share-based payments are to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has recorded approximately $643,000, $566,000, and $336,000 for 2015, 2014 and 2013, in compensation expense relating to vesting of stock options less estimated forfeitures for the 12-month period ended December 31, 2015, 2014 and 2013.
Reclassifications
— Certain reclassifications have been made to the 2014 consolidated financial statements to be comparable to 2015. These reclassifications had no effect on net income.
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Recent Accounting Pronouncements
FASB Accounting Standards Updates No. 2016-01,
Financial Instruments – Overall
(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
The FASB has issued Accounting Standards Update (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:
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•
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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;
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•
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Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
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•
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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;
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•
|
|
Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;
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•
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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
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•
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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.
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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. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB Accounting Standards Update No. 2015-16,
Business Combinations
(Topic 805):
Simplifying the Accounting for Measurement-Period Adjustments
The FASB has issued Accounting Standards Update (ASU) No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the requirement to retrospectively account for those adjustments.
U.S. GAAP currently requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of
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additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts.
The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
The amendments require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
The only disclosures required at transition should be the nature of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first annual period in which the changes are effective.
FASB Accounting Standards Update No. 2015-15,
Interest—Imputation of Interest
(Subtopic 835-30),
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
The FASB has issued Accounting Standards Update (ASU) No. 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting.
This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,
which requires the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements.
Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB Accounting Standards Update No. 2015-03, Interest—
Imputation of Interest
(Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
The FASB has issued Accounting Standards Update (ASU) No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.
The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability).
For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB Accounting Standards Update No. 2015-01,
Eliminating the Concept of Extraordinary Items
The FASB has issued Accounting Standards Update (ASU) No. 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. The objective of the simplification initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.
This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20,
Income Statement - Extraordinary and Unusual Items,
required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item.
If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.
The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
Note 2 – Acquisition
On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank N.A.’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Under the purchase method of accounting, the total estimated purchase price is allocated to Peoples net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Peoples acquisition is allocated as follows:
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash and due from banks
|
|
$
|
205,054
|
|
Investment securities, held to maturity
|
|
|
2,038
|
|
|
|
Commercial
|
|
|
67,435
|
|
Residential mortgage
|
|
|
137,331
|
|
Consumer
|
|
|
19,593
|
|
|
|
|
|
|
Total loans
|
|
|
224,359
|
|
|
|
Premises and equipment, net
|
|
|
5,524
|
|
FRB and FHLB stock
|
|
|
2,743
|
|
Goodwill
|
|
|
21,424
|
|
Core deposit intangible
|
|
|
4,394
|
|
Interest receivable
|
|
|
1,279
|
|
Cash value of life insurance
|
|
|
13,898
|
|
Other assets
|
|
|
4,364
|
|
|
|
|
|
|
Total assets purchased
|
|
$
|
485,077
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
$
|
55,506
|
|
Cash paid
|
|
|
22,641
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
78,147
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Deposits
|
|
|
|
|
Non-interest bearing
|
|
$
|
28,251
|
|
NOW accounts
|
|
|
65,771
|
|
Savings and money market
|
|
|
125,176
|
|
Certificates of deposits
|
|
|
131,889
|
|
|
|
|
|
|
Total deposits
|
|
|
351,087
|
|
|
|
Borrowings
|
|
|
48,884
|
|
Interest payable
|
|
|
21
|
|
Other liabilities
|
|
|
6,938
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
406,930
|
|
|
|
|
|
|
Of the total purchase price of $78.1 million, $4.4 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.
The Company acquired the $228.6 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.
The Company acquired certain loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
The loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
Loan with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of July 1, 2015.
|
|
|
|
|
Contractually required principal and interest at acquisition
|
|
$
|
5,730
|
|
Contractual cash flows not expected to be collected (nonaccretable differences)
|
|
|
715
|
|
|
|
|
|
|
Expected cash flows at acquisition
|
|
|
5,015
|
|
Interest component of expected cash flows (accretable discount)
|
|
|
647
|
|
|
|
|
|
|
Fair value of acquired loans accounted for under ASC 310-30
|
|
$
|
4,368
|
|
|
|
|
|
|
The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended December 31, 2015 and December 31, 2014 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
80,688
|
|
|
$
|
75,442
|
|
Provision for Loan Losses
|
|
|
3,222
|
|
|
|
3,443
|
|
|
|
|
Net Interest Income after Provision for Loan Losses
|
|
|
77,466
|
|
|
|
71,999
|
|
Non-interest Income
|
|
|
32,295
|
|
|
|
29,928
|
|
Non-Interest Expense
|
|
|
80,489
|
|
|
|
74,010
|
|
|
|
|
Income before Income Taxes
|
|
|
29,272
|
|
|
|
27,917
|
|
Income Tax Expense
|
|
|
7,359
|
|
|
|
6,560
|
|
|
|
|
Net Income
|
|
|
21,913
|
|
|
|
21,357
|
|
Net Income Available to Common Shareholders
|
|
$
|
21,788
|
|
|
$
|
21,372
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
1.90
|
|
|
$
|
1.87
|
|
Diluted Earnings Per Share
|
|
$
|
1.85
|
|
|
$
|
1.81
|
|
The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the year ended 2015 includes $2.3 million, net of tax, of operating revenue from Peoples since the acquisition and approximately $3.3 million, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.
The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition consummated as of that time, nor is it intended to be a projection of future results.
On April 3, 2014 Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014.
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ORIZON
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). For the year ended December 31, 2014, the Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base and reductions in transaction costs. The Company also expects to reduce cost through economies of scale.
Under the purchase method of accounting, the total estimated purchase price is allocated to Summit’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Summit acquisition is allocated as follows:
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,161
|
|
|
|
Commercial
|
|
|
70,441
|
|
Residential mortgage
|
|
|
43,448
|
|
Consumer
|
|
|
10,192
|
|
|
|
|
|
|
Total loans
|
|
|
124,081
|
|
|
|
Premises and equipment, net
|
|
|
2,548
|
|
FRB and FHLB stock
|
|
|
2,136
|
|
Goodwill
|
|
|
8,428
|
|
Core deposit intangible
|
|
|
822
|
|
Interest receivable
|
|
|
347
|
|
Cash value of life insurance
|
|
|
2,185
|
|
Other assets
|
|
|
2,877
|
|
|
|
|
|
|
Total assets purchased
|
|
$
|
158,585
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Deposits
|
|
|
|
|
Non-interest bearing
|
|
$
|
27,274
|
|
NOW accounts
|
|
|
16,332
|
|
Savings and money market
|
|
|
35,045
|
|
Certificates of deposits
|
|
|
42,368
|
|
|
|
|
|
|
Total deposits
|
|
|
121,019
|
|
|
|
Borrowings
|
|
|
16,990
|
|
Interest payable
|
|
|
52
|
|
Other liabilities
|
|
|
599
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
138,660
|
|
|
|
|
|
|
Of the total estimated purchase price of $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.
The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
The Company acquired the $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.
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Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Final estimates of loans for which specific credit-related deterioration has been identified, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of April 3, 2014.
|
|
|
|
|
Contractually required principal and interest at acquisition
|
|
$
|
14,460
|
|
Contractual cash flows not expected to be collected (nonaccretable differences)
|
|
|
3,146
|
|
|
|
|
|
|
Expected cash flows at acquisition
|
|
|
11,314
|
|
Interest component of expected cash flows (accretable discount)
|
|
|
1,688
|
|
|
|
|
|
|
Fair value of acquired loans accounted for under ASC 310-30
|
|
$
|
9,626
|
|
|
|
|
|
|
Pro-forma statements were not presented due to the materiality of the transaction.
Note 3 – Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2015 and 2014, cash equivalents consisted primarily of money market accounts with brokers and certificates of deposit.
At December 31, 2015, the Company’s cash accounts exceeded federally insured limits by approximately $5.0 million.
Note 4 – Securities
The fair value of securities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
5,940
|
|
|
$
|
3
|
|
|
$
|
(17
|
)
|
|
$
|
5,926
|
|
State and municipal
|
|
|
73,829
|
|
|
|
1,299
|
|
|
|
(33
|
)
|
|
|
75,095
|
|
Federal agency collateralized mortgage obligations
|
|
|
157,291
|
|
|
|
567
|
|
|
|
(1,655
|
)
|
|
|
156,203
|
|
Federal agency mortgage-backed pools
|
|
|
206,970
|
|
|
|
2,080
|
|
|
|
(1,346
|
)
|
|
|
207,704
|
|
Corporate notes
|
|
|
32
|
|
|
|
22
|
|
|
|
—
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale investment securities
|
|
$
|
444,062
|
|
|
$
|
3,971
|
|
|
$
|
(3,051
|
)
|
|
$
|
444,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
5,859
|
|
|
$
|
93
|
|
|
$
|
—
|
|
|
$
|
5,952
|
|
State and municipal
|
|
|
146,331
|
|
|
|
5,375
|
|
|
|
(253
|
)
|
|
|
151,453
|
|
Federal agency collateralized mortgage obligations
|
|
|
9,051
|
|
|
|
27
|
|
|
|
(124
|
)
|
|
|
8,954
|
|
Federal agency mortgage-backed pools
|
|
|
26,388
|
|
|
|
1,141
|
|
|
|
(185
|
)
|
|
|
27,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity investment securities
|
|
$
|
187,629
|
|
|
$
|
6,636
|
|
|
$
|
(562
|
)
|
|
$
|
193,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
26,996
|
|
|
$
|
56
|
|
|
$
|
(229
|
)
|
|
$
|
26,823
|
|
State and municipal
|
|
|
46,535
|
|
|
|
1,462
|
|
|
|
(45
|
)
|
|
|
47,952
|
|
Federal agency collateralized mortgage obligations
|
|
|
122,930
|
|
|
|
975
|
|
|
|
(1,045
|
)
|
|
|
122,860
|
|
Federal agency mortgage-backed pools
|
|
|
122,583
|
|
|
|
3,172
|
|
|
|
(360
|
)
|
|
|
125,395
|
|
Private labeled mortgage-backed pools
|
|
|
670
|
|
|
|
19
|
|
|
|
—
|
|
|
|
689
|
|
Corporate notes
|
|
|
32
|
|
|
|
13
|
|
|
|
—
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale investment securities
|
|
$
|
319,746
|
|
|
$
|
5,697
|
|
|
$
|
(1,679
|
)
|
|
$
|
323,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
9,804
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
9,886
|
|
State and municipal
|
|
|
129,595
|
|
|
|
3,398
|
|
|
|
(106
|
)
|
|
|
132,887
|
|
Federal agency collateralized mortgage obligations
|
|
|
4,039
|
|
|
|
35
|
|
|
|
(1
|
)
|
|
|
4,073
|
|
Federal agency mortgage-backed pools
|
|
|
22,329
|
|
|
|
729
|
|
|
|
—
|
|
|
|
23,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity investment securities
|
|
$
|
165,767
|
|
|
$
|
4,244
|
|
|
$
|
(107
|
)
|
|
$
|
169,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for 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 December 31, 2015, no individual investment security had an unrealized loss that was determined to be other-than-temporary.
The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the 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 December 31, 2015.
The Company elected to transfer 319 available-for-sale (“AFS”) securities with an aggregate fair value of $167.1 million to a classification of held-to-maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.
The amortized cost and fair value of securities available for sale and held-to-maturity at December 31, 2015 and December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
7,192
|
|
|
$
|
7,232
|
|
|
$
|
6,098
|
|
|
$
|
6,169
|
|
One to five years
|
|
|
38,197
|
|
|
|
38,894
|
|
|
|
44,720
|
|
|
|
45,093
|
|
Five to ten years
|
|
|
16,807
|
|
|
|
17,152
|
|
|
|
16,147
|
|
|
|
16,768
|
|
After ten years
|
|
|
17,605
|
|
|
|
17,797
|
|
|
|
6,598
|
|
|
|
6,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,801
|
|
|
|
81,075
|
|
|
|
73,563
|
|
|
|
74,820
|
|
Federal agency collateralized mortgage obligations
|
|
|
157,291
|
|
|
|
156,203
|
|
|
|
122,930
|
|
|
|
122,860
|
|
Federal agency mortgage-backed pools
|
|
|
206,970
|
|
|
|
207,704
|
|
|
|
122,583
|
|
|
|
125,395
|
|
Private labeled mortgage-backed pools
|
|
|
—
|
|
|
|
—
|
|
|
|
670
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale investment securities
|
|
$
|
444,062
|
|
|
$
|
444,982
|
|
|
$
|
319,746
|
|
|
$
|
323,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
One to five years
|
|
|
17,815
|
|
|
|
18,403
|
|
|
|
592
|
|
|
|
593
|
|
Five to ten years
|
|
|
106,167
|
|
|
|
110,026
|
|
|
|
99,225
|
|
|
|
101,323
|
|
After ten years
|
|
|
28,208
|
|
|
|
28,976
|
|
|
|
39,582
|
|
|
|
40,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,190
|
|
|
|
157,404
|
|
|
|
139,399
|
|
|
|
142,773
|
|
Federal agency collateralized mortgage obligations
|
|
|
9,051
|
|
|
|
8,954
|
|
|
|
4,039
|
|
|
|
4,073
|
|
Federal agency mortgage-backed pools
|
|
|
26,388
|
|
|
|
27,344
|
|
|
|
22,329
|
|
|
|
23,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity investment securities
|
|
$
|
187,629
|
|
|
$
|
193,703
|
|
|
$
|
165,767
|
|
|
$
|
169,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
December 31, 2015
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
5,468
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,468
|
|
|
$
|
(17
|
)
|
State and municipal
|
|
|
17,353
|
|
|
|
(280
|
)
|
|
|
446
|
|
|
|
(6
|
)
|
|
|
17,799
|
|
|
|
(286
|
)
|
Federal agency collateralized mortgage obligations
|
|
|
89,459
|
|
|
|
(1,123
|
)
|
|
|
25,428
|
|
|
|
(655
|
)
|
|
|
114,887
|
|
|
|
(1,779
|
)
|
Federal agency mortgage-backed pools
|
|
|
113,244
|
|
|
|
(1,212
|
)
|
|
|
16,506
|
|
|
|
(319
|
)
|
|
|
129,750
|
|
|
|
(1,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
225,524
|
|
|
$
|
(2,632
|
)
|
|
$
|
42,380
|
|
|
$
|
(980
|
)
|
|
$
|
267,904
|
|
|
$
|
(3,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
December 31, 2014
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
2,993
|
|
|
$
|
(7
|
)
|
|
$
|
20,762
|
|
|
$
|
(222
|
)
|
|
$
|
23,755
|
|
|
$
|
(229
|
)
|
State and municipal
|
|
|
10,287
|
|
|
|
(121
|
)
|
|
|
2,050
|
|
|
|
(30
|
)
|
|
|
12,337
|
|
|
|
(151
|
)
|
Federal agency collateralized mortgage obligations
|
|
|
15,013
|
|
|
|
(88
|
)
|
|
|
39,801
|
|
|
|
(957
|
)
|
|
|
54,814
|
|
|
|
(1,045
|
)
|
Federal agency mortgage-backed pools
|
|
|
5,993
|
|
|
|
(9
|
)
|
|
|
28,044
|
|
|
|
(351
|
)
|
|
|
34,037
|
|
|
|
(360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
34,286
|
|
|
$
|
(225
|
)
|
|
$
|
90,657
|
|
|
$
|
(1,560
|
)
|
|
$
|
124,943
|
|
|
$
|
(1,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, federal agency, state and municipal
The unrealized losses on the Company’s investments in U.S. Treasury, federal agency and state and municipals were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.
Federal agency mortgage-backed pools and collateralized mortgage obligations
The unrealized losses on the Company’s investment in federal agency mortgage backed pools and collateralized mortgage obligations securities were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.
Information regarding security proceeds, gross gains and gross losses are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Sales of securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
43,051
|
|
|
$
|
45,228
|
|
|
$
|
23,853
|
|
Gross gains
|
|
|
254
|
|
|
|
988
|
|
|
|
382
|
|
Gross losses
|
|
|
(65
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
The tax effect of the proceeds from the sale of securities available for sale was $66, $346 and $131 for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company pledges securities to secure retail and corporate repurchase agreements to the Federal Reserve for borrowing availability and as settlements for the fair value of swap agreements. At December 31, 2015, the Company had pledged
75
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
$168.9 million of fair value or $167.7 million of amortized cost, in securities as collateral for $154.4 million in repurchase agreements, $90.7 million of fair value or $88.7 million of amortized cost, in securities as collateral for borrowing availability at the Federal Reserve with no current outstanding borrowings and $12.7 million of fair value or $12.5 million of amortized cost, in securities as collateral for $4.9 million in settlements on the fair value of swap agreements.
Note 5 – Loans
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
Commercial
|
|
|
|
|
|
|
|
|
Working capital and equipment
|
|
$
|
381,245
|
|
|
$
|
300,940
|
|
Real estate, including agriculture
|
|
|
391,668
|
|
|
|
343,455
|
|
Tax exempt
|
|
|
8,674
|
|
|
|
8,595
|
|
Other
|
|
|
23,408
|
|
|
|
21,324
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
804,995
|
|
|
|
674,314
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
1–4 family
|
|
|
433,015
|
|
|
|
250,799
|
|
Other
|
|
|
4,129
|
|
|
|
3,826
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
437,144
|
|
|
|
254,625
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Auto
|
|
|
168,397
|
|
|
|
154,538
|
|
Recreation
|
|
|
5,365
|
|
|
|
5,673
|
|
Real estate/home improvement
|
|
|
47,015
|
|
|
|
38,288
|
|
Home equity
|
|
|
127,113
|
|
|
|
112,426
|
|
Unsecured
|
|
|
4,120
|
|
|
|
3,613
|
|
Other
|
|
|
10,290
|
|
|
|
5,921
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
362,300
|
|
|
|
320,459
|
|
|
|
|
Mortgage warehouse
|
|
|
144,692
|
|
|
|
129,156
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,749,131
|
|
|
|
1,378,554
|
|
Allowance for loan losses
|
|
|
(14,534
|
)
|
|
|
(16,501
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,734,597
|
|
|
$
|
1,362,053
|
|
|
|
|
|
|
|
|
|
|
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
76
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Real Estate and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Mortgage Warehousing
Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage and the related mortgagee are underwritten by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reaquire 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.
77
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table shows the recorded investment of individual loan categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Loan
Balance
|
|
|
Interest Due
|
|
|
Deferred
Fees / (Costs)
|
|
|
Recorded
Investment
|
|
Owner occupied real estate
|
|
$
|
268,281
|
|
|
$
|
613
|
|
|
$
|
1,328
|
|
|
$
|
270,222
|
|
Non owner occupied real estate
|
|
|
326,399
|
|
|
|
306
|
|
|
|
497
|
|
|
|
327,202
|
|
Residential spec homes
|
|
|
5,018
|
|
|
|
9
|
|
|
|
17
|
|
|
|
5,044
|
|
Development & spec land loans
|
|
|
18,183
|
|
|
|
33
|
|
|
|
26
|
|
|
|
18,242
|
|
Commercial and industrial
|
|
|
184,911
|
|
|
|
1,246
|
|
|
|
335
|
|
|
|
186,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
802,792
|
|
|
|
2,207
|
|
|
|
2,203
|
|
|
|
807,202
|
|
|
|
|
|
|
Residential mortgage
|
|
|
414,924
|
|
|
|
1,275
|
|
|
|
2,470
|
|
|
|
418,669
|
|
Residential construction
|
|
|
19,751
|
|
|
|
34
|
|
|
|
—
|
|
|
|
19,785
|
|
Mortgage warehouse
|
|
|
144,692
|
|
|
|
480
|
|
|
|
—
|
|
|
|
145,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
579,367
|
|
|
|
1,789
|
|
|
|
2,470
|
|
|
|
583,626
|
|
|
|
|
|
|
Direct installment
|
|
|
54,341
|
|
|
|
168
|
|
|
|
(359
|
)
|
|
|
54,150
|
|
Direct installment purchased
|
|
|
153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
153
|
|
Indirect installment
|
|
|
151,523
|
|
|
|
323
|
|
|
|
—
|
|
|
|
151,846
|
|
Home equity
|
|
|
157,164
|
|
|
|
628
|
|
|
|
(522
|
)
|
|
|
157,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
363,181
|
|
|
|
1,119
|
|
|
|
(881
|
)
|
|
|
363,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,745,340
|
|
|
|
5,115
|
|
|
|
3,792
|
|
|
|
1,754,247
|
|
Allowance for loan losses
|
|
|
(14,534
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,730,806
|
|
|
$
|
5,115
|
|
|
$
|
3,792
|
|
|
$
|
1,739,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Loan
Balance
|
|
|
Interest Due
|
|
|
Deferred
Fees / (Costs)
|
|
|
Recorded
Investment
|
|
Owner occupied real estate
|
|
$
|
228,380
|
|
|
$
|
385
|
|
|
$
|
680
|
|
|
$
|
229,445
|
|
Non owner occupied real estate
|
|
|
297,299
|
|
|
|
309
|
|
|
|
506
|
|
|
|
298,114
|
|
Residential spec homes
|
|
|
2,027
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2,029
|
|
Development & spec land loans
|
|
|
12,097
|
|
|
|
28
|
|
|
|
30
|
|
|
|
12,155
|
|
Commercial and industrial
|
|
|
133,256
|
|
|
|
859
|
|
|
|
39
|
|
|
|
134,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
673,059
|
|
|
|
1,583
|
|
|
|
1,255
|
|
|
|
675,897
|
|
|
|
|
|
|
Residential mortgage
|
|
|
242,521
|
|
|
|
737
|
|
|
|
599
|
|
|
|
243,857
|
|
Residential construction
|
|
|
11,505
|
|
|
|
21
|
|
|
|
—
|
|
|
|
11,526
|
|
Mortgage warehouse
|
|
|
129,156
|
|
|
|
480
|
|
|
|
—
|
|
|
|
129,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
383,182
|
|
|
|
1,238
|
|
|
|
599
|
|
|
|
385,019
|
|
|
|
|
|
|
Direct installment
|
|
|
40,137
|
|
|
|
129
|
|
|
|
(375
|
)
|
|
|
39,891
|
|
Direct installment purchased
|
|
|
219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
Indirect installment
|
|
|
141,868
|
|
|
|
314
|
|
|
|
(163
|
)
|
|
|
142,019
|
|
Home equity
|
|
|
139,007
|
|
|
|
568
|
|
|
|
(234
|
)
|
|
|
139,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
321,231
|
|
|
|
1,011
|
|
|
|
(772
|
)
|
|
|
321,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,377,472
|
|
|
|
3,832
|
|
|
|
1,082
|
|
|
|
1,382,386
|
|
Allowance for loan losses
|
|
|
(16,501
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,360,971
|
|
|
$
|
3,832
|
|
|
$
|
1,082
|
|
|
$
|
1,365,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 6 – 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
|
Heartland
|
|
|
Summit
|
|
|
Peoples
|
|
|
Total
|
|
Commercial
|
|
$
|
1,633
|
|
|
$
|
5,567
|
|
|
$
|
1,061
|
|
|
$
|
8,261
|
|
Real estate
|
|
|
693
|
|
|
|
1,216
|
|
|
|
179
|
|
|
|
2,088
|
|
Consumer
|
|
|
6
|
|
|
|
35
|
|
|
|
—
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
$
|
2,332
|
|
|
$
|
6,818
|
|
|
$
|
1,240
|
|
|
$
|
10,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount, net of allowance of $63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2014
|
|
|
2014
|
|
|
2014
|
|
|
2014
|
|
|
|
Heartland
|
|
|
Summit
|
|
|
Peoples
|
|
|
Total
|
|
Commercial
|
|
$
|
5,492
|
|
|
$
|
7,725
|
|
|
$
|
—
|
|
|
$
|
13,217
|
|
Real estate
|
|
|
900
|
|
|
|
1,458
|
|
|
|
—
|
|
|
|
2,358
|
|
Consumer
|
|
|
8
|
|
|
|
43
|
|
|
|
—
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
$
|
6,400
|
|
|
$
|
9,226
|
|
|
$
|
—
|
|
|
$
|
15,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount, net of allowance of $359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield, or income expected to be collected are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2015
|
|
|
|
Heartland
|
|
|
Summit
|
|
|
Peoples
|
|
|
Total
|
|
Balance at January 1
|
|
$
|
2,400
|
|
|
$
|
1,268
|
|
|
$
|
—
|
|
|
$
|
3,668
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
|
|
647
|
|
Accretion
|
|
|
(327
|
)
|
|
|
(315
|
)
|
|
|
(83
|
)
|
|
|
(725
|
)
|
Reclassification from nonaccretable difference
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Disposals
|
|
|
(1,278
|
)
|
|
|
(245
|
)
|
|
|
(9
|
)
|
|
|
(1,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
795
|
|
|
$
|
708
|
|
|
$
|
555
|
|
|
$
|
2,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2014
|
|
|
|
Heartland
|
|
|
Summit
|
|
|
Peoples
|
|
|
Total
|
|
Balance at January 1
|
|
$
|
3,185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,185
|
|
Additions
|
|
|
—
|
|
|
|
1,688
|
|
|
|
—
|
|
|
|
1,688
|
|
Accretion
|
|
|
(557
|
)
|
|
|
(332
|
)
|
|
|
—
|
|
|
|
(889
|
)
|
Reclassification from nonaccretable difference
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Disposals
|
|
|
(228
|
)
|
|
|
(88
|
)
|
|
|
—
|
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,400
|
|
|
$
|
1,268
|
|
|
$
|
—
|
|
|
$
|
3,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
During the years ended December 31, 2015 and 2014, the Company increased (decreased) the allowance for loan losses by a charge to the income statement of $(190,000) and $253,000, respectively. $63,000 and $283,000 of allowances for loan losses were reversed for the years ended December 31, 2015 and 2014, respectively.
Note 7 – Allowance for Loan Losses
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Balance at beginning of the period
|
|
$
|
16,501
|
|
|
$
|
15,992
|
|
|
$
|
18,270
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
|
2,208
|
|
|
|
40
|
|
|
|
138
|
|
Non owner occupied real estate
|
|
|
556
|
|
|
|
136
|
|
|
|
937
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
173
|
|
|
|
182
|
|
Commercial and industrial
|
|
|
673
|
|
|
|
1,453
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,437
|
|
|
|
1,802
|
|
|
|
2,532
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
288
|
|
|
|
328
|
|
|
|
1,055
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
288
|
|
|
|
328
|
|
|
|
1,055
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
367
|
|
|
|
250
|
|
|
|
333
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indirect Installment
|
|
|
1,081
|
|
|
|
1,233
|
|
|
|
1,178
|
|
Home Equity
|
|
|
926
|
|
|
|
516
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,374
|
|
|
|
1,999
|
|
|
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged-off
|
|
|
6,099
|
|
|
|
4,129
|
|
|
|
6,250
|
|
|
|
|
|
Recoveries of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
|
104
|
|
|
|
13
|
|
|
|
65
|
|
Non owner occupied real estate
|
|
|
1
|
|
|
|
210
|
|
|
|
71
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
35
|
|
|
|
55
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
52
|
|
|
|
495
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
192
|
|
|
|
773
|
|
|
|
668
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
69
|
|
|
|
21
|
|
|
|
114
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
69
|
|
|
|
21
|
|
|
|
114
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
106
|
|
|
|
67
|
|
|
|
488
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indirect Installment
|
|
|
489
|
|
|
|
560
|
|
|
|
658
|
|
Home Equity
|
|
|
114
|
|
|
|
159
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
709
|
|
|
|
786
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan recoveries
|
|
|
970
|
|
|
|
1,580
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off (recovered)
|
|
|
5,129
|
|
|
|
2,549
|
|
|
|
4,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision charged to operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,531
|
|
|
|
2,277
|
|
|
|
756
|
|
Real estate
|
|
|
62
|
|
|
|
(1,153
|
)
|
|
|
1,132
|
|
Consumer
|
|
|
569
|
|
|
|
1,934
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision charged to operating expense
|
|
|
3,162
|
|
|
|
3,058
|
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
14,534
|
|
|
$
|
16,501
|
|
|
$
|
15,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for 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.
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 and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Commercial
|
|
|
Real Estate
|
|
|
Mortgage
Warehousing
|
|
|
Consumer
|
|
|
Total
|
|
Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
202
|
|
Collectively evaluated for impairment
|
|
|
6,739
|
|
|
|
2,476
|
|
|
|
1,007
|
|
|
|
3,856
|
|
|
|
14,078
|
|
Loans acquired with deteriorated credit quality
|
|
|
254
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
7,195
|
|
|
$
|
2,476
|
|
|
$
|
1,007
|
|
|
$
|
3,856
|
|
|
$
|
14,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
7,019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,019
|
|
Collectively evaluated for impairment
|
|
|
798,454
|
|
|
|
438,454
|
|
|
|
145,172
|
|
|
|
363,419
|
|
|
|
1,745,499
|
|
Loans acquired with deteriorated credit quality
|
|
|
1,729
|
|
|
|
—
|
|
|
|
?
|
|
|
|
—
|
|
|
|
1,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
807,202
|
|
|
$
|
438,454
|
|
|
$
|
145,172
|
|
|
$
|
363,419
|
|
|
$
|
1,754,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Commercial
|
|
|
Real Estate
|
|
|
Mortgage
Warehousing
|
|
|
Consumer
|
|
|
Total
|
|
Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,589
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,589
|
|
Collectively evaluated for impairment
|
|
|
5,827
|
|
|
|
2,508
|
|
|
|
1,132
|
|
|
|
4,951
|
|
|
|
14,418
|
|
Loans acquired with deteriorated credit quality
|
|
|
494
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
7,910
|
|
|
$
|
2,508
|
|
|
$
|
1,132
|
|
|
$
|
4,951
|
|
|
$
|
16,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
11,055
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,055
|
|
Collectively evaluated for impairment
|
|
|
664,251
|
|
|
|
255,383
|
|
|
|
129,636
|
|
|
|
321,470
|
|
|
|
1,370,740
|
|
Loans acquired with deteriorated credit quality
|
|
|
591
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
675,897
|
|
|
$
|
255,383
|
|
|
$
|
129,636
|
|
|
$
|
321,470
|
|
|
$
|
1,382,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 8 – Non-performing Assets and Impaired Loans
The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Non-accrual
|
|
|
Loans Past
Due Over 90
Days Still
Accruing
|
|
|
Non-
Performing
TDRs
|
|
|
Performing
TDRs
|
|
|
Total Non-
Performing
Loans
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
1,749
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,749
|
|
Non owner occupied real estate
|
|
|
3,034
|
|
|
|
—
|
|
|
|
1,915
|
|
|
|
60
|
|
|
|
5,009
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
Commercial and industrial
|
|
|
176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
5,030
|
|
|
|
—
|
|
|
|
1,915
|
|
|
|
60
|
|
|
|
7,005
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
4,354
|
|
|
|
1
|
|
|
|
824
|
|
|
|
808
|
|
|
|
5,987
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
|
|
250
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
4,354
|
|
|
|
1
|
|
|
|
1,074
|
|
|
|
808
|
|
|
|
6,237
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
541
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
541
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indirect Installment
|
|
|
601
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
628
|
|
Home Equity
|
|
|
1,736
|
|
|
|
—
|
|
|
|
183
|
|
|
|
350
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
2,878
|
|
|
|
27
|
|
|
|
183
|
|
|
|
350
|
|
|
|
3,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,262
|
|
|
$
|
28
|
|
|
$
|
3,172
|
|
|
$
|
1,218
|
|
|
$
|
16,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Non-accrual
|
|
|
Loans Past
Due Over 90
Days Still
Accruing
|
|
|
Non-
Performing
TDRs
|
|
|
Performing
TDRs
|
|
|
Total Non-
Performing
Loans
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
1,773
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
1,817
|
|
Non owner occupied real estate
|
|
|
7,439
|
|
|
|
—
|
|
|
|
217
|
|
|
|
566
|
|
|
|
8,222
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
812
|
|
|
|
—
|
|
|
|
1,004
|
|
|
|
—
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
10,024
|
|
|
|
—
|
|
|
|
1,221
|
|
|
|
610
|
|
|
|
11,855
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
2,297
|
|
|
|
40
|
|
|
|
765
|
|
|
|
2,526
|
|
|
|
5,628
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
266
|
|
|
|
—
|
|
|
|
266
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
2,297
|
|
|
|
40
|
|
|
|
1,031
|
|
|
|
2,526
|
|
|
|
5,894
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
227
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
237
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indirect Installment
|
|
|
557
|
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
604
|
|
Home Equity
|
|
|
2,207
|
|
|
|
18
|
|
|
|
391
|
|
|
|
1,236
|
|
|
|
3,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
2,991
|
|
|
|
75
|
|
|
|
391
|
|
|
|
1,236
|
|
|
|
4,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,312
|
|
|
$
|
115
|
|
|
$
|
2,643
|
|
|
$
|
4,372
|
|
|
$
|
22,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Included in the $12.3 million of non-accrual loans and the $3.2 million of non-performing TDRs at December 31, 2015 were $2.9 million and $110,000, respectively, of loans acquired for which there were accretable yields recognized.
From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Operating Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At December 31, 2015, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of December 31, 2015, the Company had $4.4 million in TDRs and $1.2 million were performing according to the restructured terms and no TDRs were returned to accrual status during 2015. There was $140,000 of specific reserves allocated to TDRs at December 31, 2015 based on the collateral deficiencies.
83
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table presents commercial loans individually evaluated for impairment by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending
|
|
December 31, 2015
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance For
Loan Loss
Allocated
|
|
|
Average
Balance in
Impaired
Loans
|
|
|
Cash/Accrual
Interest
Income
Recognized
|
|
With no recorded allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
1,340
|
|
|
$
|
1,339
|
|
|
$
|
—
|
|
|
$
|
1,001
|
|
|
$
|
22
|
|
Non owner occupied real estate
|
|
|
4,938
|
|
|
|
4,953
|
|
|
|
—
|
|
|
|
5,417
|
|
|
|
8
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
71
|
|
|
|
71
|
|
|
|
—
|
|
|
|
6
|
|
|
|
3
|
|
Commercial and industrial
|
|
|
79
|
|
|
|
79
|
|
|
|
—
|
|
|
|
275
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
6,428
|
|
|
|
6,442
|
|
|
|
—
|
|
|
|
6,699
|
|
|
|
37
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
|
410
|
|
|
|
410
|
|
|
|
105
|
|
|
|
243
|
|
|
|
8
|
|
Non owner occupied real estate
|
|
|
70
|
|
|
|
70
|
|
|
|
32
|
|
|
|
6
|
|
|
|
13
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
97
|
|
|
|
97
|
|
|
|
65
|
|
|
|
162
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
577
|
|
|
|
577
|
|
|
|
202
|
|
|
|
411
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,005
|
|
|
$
|
7,019
|
|
|
$
|
202
|
|
|
$
|
7,110
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending
|
|
December 31, 2014
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance For
Loan Loss
Allocated
|
|
|
Average
Balance in
Impaired
Loans
|
|
|
Cash/Accrual
Interest
Income
Recognized
|
|
With no recorded allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
1,169
|
|
|
$
|
1,170
|
|
|
$
|
—
|
|
|
$
|
645
|
|
|
$
|
65
|
|
Non owner occupied real estate
|
|
|
1,193
|
|
|
|
1,194
|
|
|
|
—
|
|
|
|
1,341
|
|
|
|
51
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
854
|
|
|
|
854
|
|
|
|
—
|
|
|
|
357
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,216
|
|
|
|
3,218
|
|
|
|
—
|
|
|
|
2,343
|
|
|
|
143
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
|
422
|
|
|
|
422
|
|
|
|
165
|
|
|
|
141
|
|
|
|
16
|
|
Non owner occupied real estate
|
|
|
6,453
|
|
|
|
6,453
|
|
|
|
744
|
|
|
|
1,995
|
|
|
|
208
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
962
|
|
|
|
962
|
|
|
|
680
|
|
|
|
798
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
7,837
|
|
|
|
7,837
|
|
|
|
1,589
|
|
|
|
2,934
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,053
|
|
|
$
|
11,055
|
|
|
$
|
1,589
|
|
|
$
|
5,277
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending
|
|
December 31, 2013
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance For
Loan Loss
Allocated
|
|
|
Average
Balance in
Impaired
Loans
|
|
|
Cash/Accrual
Interest
Income
Recognized
|
|
With no recorded allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
1,293
|
|
|
$
|
1,296
|
|
|
$
|
—
|
|
|
$
|
1,845
|
|
|
$
|
68
|
|
Non owner occupied real estate
|
|
|
3,521
|
|
|
|
3,525
|
|
|
|
—
|
|
|
|
2,963
|
|
|
|
172
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
23
|
|
|
|
23
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
390
|
|
|
|
405
|
|
|
|
—
|
|
|
|
712
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
5,227
|
|
|
|
5,249
|
|
|
|
—
|
|
|
|
5,545
|
|
|
|
240
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non owner occupied real estate
|
|
|
403
|
|
|
|
403
|
|
|
|
202
|
|
|
|
485
|
|
|
|
—
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development & Spec Land Loans
|
|
|
159
|
|
|
|
159
|
|
|
|
48
|
|
|
|
166
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
1,637
|
|
|
|
1,637
|
|
|
|
1,062
|
|
|
|
1,140
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2,199
|
|
|
|
2,199
|
|
|
|
1,312
|
|
|
|
1,791
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,426
|
|
|
$
|
7,448
|
|
|
$
|
1,312
|
|
|
$
|
7,336
|
|
|
$
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the payment status by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
30 - 59 Days
Past Due
|
|
|
60 - 89 Days
Past Due
|
|
|
Greater than 90
Days Past Due
|
|
|
Total Past Due
|
|
|
Loans Not Past
Due
|
|
|
Total
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
481
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
499
|
|
|
$
|
267,782
|
|
|
$
|
268,281
|
|
Non owner occupied real estate
|
|
|
49
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49
|
|
|
|
326,350
|
|
|
|
326,399
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,018
|
|
|
|
5,018
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,183
|
|
|
|
18,183
|
|
Commercial and industrial
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
|
|
184,879
|
|
|
|
184,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
562
|
|
|
|
18
|
|
|
|
—
|
|
|
|
580
|
|
|
|
802,212
|
|
|
|
802,792
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,121
|
|
|
|
344
|
|
|
|
1
|
|
|
|
1,466
|
|
|
|
413,458
|
|
|
|
414,924
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,751
|
|
|
|
19,751
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,692
|
|
|
|
144,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
1,121
|
|
|
|
344
|
|
|
|
1
|
|
|
|
1,466
|
|
|
|
577,901
|
|
|
|
579,367
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
106
|
|
|
|
10
|
|
|
|
—
|
|
|
|
116
|
|
|
|
54,225
|
|
|
|
54,341
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
153
|
|
|
|
153
|
|
Indirect Installment
|
|
|
1,186
|
|
|
|
268
|
|
|
|
27
|
|
|
|
1,481
|
|
|
|
150,042
|
|
|
|
151,523
|
|
Home Equity
|
|
|
1,193
|
|
|
|
203
|
|
|
|
—
|
|
|
|
1,396
|
|
|
|
155,768
|
|
|
|
157,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,485
|
|
|
|
481
|
|
|
|
27
|
|
|
|
2,993
|
|
|
|
360,188
|
|
|
|
363,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,168
|
|
|
$
|
843
|
|
|
$
|
28
|
|
|
$
|
5,039
|
|
|
$
|
1,740,301
|
|
|
$
|
1,745,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
0.24
|
%
|
|
|
0.05
|
%
|
|
|
0.00
|
%
|
|
|
0.29
|
%
|
|
|
99.71
|
%
|
|
|
|
|
85
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
30 - 59 Days
Past Due
|
|
|
60 - 89 Days
Past Due
|
|
|
Greater than 90
Days Past Due
|
|
|
Total Past Due
|
|
|
Loans Not Past
Due
|
|
|
Total
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
103
|
|
|
$
|
645
|
|
|
$
|
—
|
|
|
$
|
748
|
|
|
$
|
227,632
|
|
|
$
|
228,380
|
|
Non owner occupied real estate
|
|
|
413
|
|
|
|
—
|
|
|
|
—
|
|
|
|
413
|
|
|
|
296,886
|
|
|
|
297,299
|
|
Residential development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,027
|
|
|
|
2,027
|
|
Development & Spec Land Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,097
|
|
|
|
12,097
|
|
Commercial and industrial
|
|
|
19
|
|
|
|
1
|
|
|
|
—
|
|
|
|
20
|
|
|
|
133,236
|
|
|
|
133,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
535
|
|
|
|
646
|
|
|
|
—
|
|
|
|
1,181
|
|
|
|
671,878
|
|
|
|
673,059
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,033
|
|
|
|
193
|
|
|
|
40
|
|
|
|
1,266
|
|
|
|
241,255
|
|
|
|
242,521
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,505
|
|
|
|
11,505
|
|
Mortgage warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
129,156
|
|
|
|
129,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
1,033
|
|
|
|
193
|
|
|
|
40
|
|
|
|
1,266
|
|
|
|
381,916
|
|
|
|
383,182
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
113
|
|
|
|
4
|
|
|
|
10
|
|
|
|
127
|
|
|
|
40,010
|
|
|
|
40,137
|
|
Direct Installment Purchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
|
|
219
|
|
Indirect Installment
|
|
|
1,042
|
|
|
|
243
|
|
|
|
47
|
|
|
|
1,332
|
|
|
|
140,536
|
|
|
|
141,868
|
|
Home Equity
|
|
|
1,084
|
|
|
|
189
|
|
|
|
18
|
|
|
|
1,291
|
|
|
|
137,716
|
|
|
|
139,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,239
|
|
|
|
436
|
|
|
|
75
|
|
|
|
2,750
|
|
|
|
318,481
|
|
|
|
321,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,807
|
|
|
$
|
1,275
|
|
|
$
|
115
|
|
|
$
|
5,197
|
|
|
$
|
1,372,275
|
|
|
$
|
1,377,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
0.28
|
%
|
|
|
0.09
|
%
|
|
|
0.01
|
%
|
|
|
0.38
|
%
|
|
|
99.62
|
%
|
|
|
|
|
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.
Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
•
|
|
For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).
|
•
|
|
Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the CCO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO, however, lenders must present their factual information to either the Loan Committee or the CCO when recommending an upgrade.
|
•
|
|
The CCO, or his designee, meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.
|
•
|
|
Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.
|
For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.
86
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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.
|
|
•
|
|
During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.
|
Risk Grade 4 Satisfactory/Monitored:
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.
Risk Grade 4W Management Watch:
Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.
87
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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.
|
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.
88
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table presents loans by credit grades.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
257,181
|
|
|
$
|
4,954
|
|
|
$
|
6,146
|
|
|
$
|
—
|
|
|
$
|
268,281
|
|
Non owner occupied real estate
|
|
|
320,216
|
|
|
|
585
|
|
|
|
5,598
|
|
|
|
—
|
|
|
|
326,399
|
|
Residential development
|
|
|
5,018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,018
|
|
Development & Spec Land Loans
|
|
|
18,112
|
|
|
|
—
|
|
|
|
71
|
|
|
|
—
|
|
|
|
18,183
|
|
Commercial and industrial
|
|
|
180,581
|
|
|
|
693
|
|
|
|
3,637
|
|
|
|
—
|
|
|
|
184,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
781,108
|
|
|
|
6,232
|
|
|
|
15,452
|
|
|
|
—
|
|
|
|
802,792
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
408,937
|
|
|
|
—
|
|
|
|
5,987
|
|
|
|
—
|
|
|
|
414,924
|
|
Residential construction
|
|
|
19,501
|
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
|
|
19,751
|
|
Mortgage warehouse
|
|
|
144,692
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
573,130
|
|
|
|
—
|
|
|
|
6,237
|
|
|
|
—
|
|
|
|
579,367
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
53,800
|
|
|
|
—
|
|
|
|
541
|
|
|
|
—
|
|
|
|
54,341
|
|
Direct Installment Purchased
|
|
|
153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
153
|
|
Indirect Installment
|
|
|
150,895
|
|
|
|
—
|
|
|
|
628
|
|
|
|
—
|
|
|
|
151,523
|
|
Home Equity
|
|
|
154,895
|
|
|
|
—
|
|
|
|
2,269
|
|
|
|
—
|
|
|
|
157,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
359,743
|
|
|
|
—
|
|
|
|
3,438
|
|
|
|
—
|
|
|
|
363,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,713,981
|
|
|
$
|
6,232
|
|
|
$
|
25,127
|
|
|
$
|
—
|
|
|
$
|
1,745,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
98.20
|
%
|
|
|
0.36
|
%
|
|
|
1.44
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied real estate
|
|
$
|
215,874
|
|
|
$
|
7,623
|
|
|
$
|
4,883
|
|
|
$
|
—
|
|
|
$
|
228,380
|
|
Non owner occupied real estate
|
|
|
283,518
|
|
|
|
4,458
|
|
|
|
9,323
|
|
|
|
—
|
|
|
|
297,299
|
|
Residential development
|
|
|
2,027
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,027
|
|
Development & Spec Land Loans
|
|
|
12,018
|
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,097
|
|
Commercial and industrial
|
|
|
128,589
|
|
|
|
1,799
|
|
|
|
2,868
|
|
|
|
—
|
|
|
|
133,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
642,026
|
|
|
|
13,959
|
|
|
|
17,074
|
|
|
|
—
|
|
|
|
673,059
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
236,893
|
|
|
|
—
|
|
|
|
5,628
|
|
|
|
—
|
|
|
|
242,521
|
|
Residential construction
|
|
|
11,239
|
|
|
|
—
|
|
|
|
266
|
|
|
|
—
|
|
|
|
11,505
|
|
Mortgage warehouse
|
|
|
129,156
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
129,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
377,288
|
|
|
|
—
|
|
|
|
5,894
|
|
|
|
—
|
|
|
|
383,182
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Installment
|
|
|
39,900
|
|
|
|
—
|
|
|
|
237
|
|
|
|
—
|
|
|
|
40,137
|
|
Direct Installment Purchased
|
|
|
219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
Indirect Installment
|
|
|
141,264
|
|
|
|
—
|
|
|
|
604
|
|
|
|
—
|
|
|
|
141,868
|
|
Home Equity
|
|
|
135,155
|
|
|
|
—
|
|
|
|
3,852
|
|
|
|
—
|
|
|
|
139,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
316,538
|
|
|
|
—
|
|
|
|
4,693
|
|
|
|
—
|
|
|
|
321,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,335,853
|
|
|
$
|
13,959
|
|
|
$
|
27,661
|
|
|
$
|
—
|
|
|
$
|
1,377,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
96.98
|
%
|
|
|
1.01
|
%
|
|
|
2.01
|
%
|
|
|
0.00
|
%
|
|
|
|
|
89
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 9 – Premises and Equipment
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Land
|
|
$
|
19,475
|
|
|
$
|
16,550
|
|
Buildings and improvements
|
|
|
55,341
|
|
|
|
49,066
|
|
Furniture and equipment
|
|
|
15,702
|
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
90,518
|
|
|
|
79,411
|
|
Accumulated depreciation
|
|
|
(29,720
|
)
|
|
|
(26,950
|
)
|
|
|
|
|
|
|
|
|
|
Net premise and equipment
|
|
$
|
60,798
|
|
|
$
|
52,461
|
|
|
|
|
|
|
|
|
|
|
Note 10 – Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1,164.3 million and $1,035.5 million at December 31, 2015 and 2014.
The aggregate fair value of capitalized mortgage servicing rights was approximately $10.8 million, $10.5 million, and $9.9 million at December 31, 2015, 2014 and 2013, compared to the carrying values of $8.9 million, $7.6 million and $7.0 million, respectively. The fair value of capitalized mortgage servicing rights was approximately $6.6 million on January 1, 2013. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1
|
|
$
|
7,980
|
|
|
$
|
7,428
|
|
|
$
|
6,169
|
|
Servicing rights capitalized
|
|
|
2,974
|
|
|
|
2,280
|
|
|
|
2,535
|
|
Amortization of servicing rights
|
|
|
(1,683
|
)
|
|
|
(1,728
|
)
|
|
|
(1,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
|
9,271
|
|
|
|
7,980
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1
|
|
|
(338
|
)
|
|
|
(389
|
)
|
|
|
(1,024
|
)
|
Additions
|
|
|
(130
|
)
|
|
|
(95
|
)
|
|
|
(54
|
)
|
Reductions
|
|
|
71
|
|
|
|
146
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
|
(397
|
)
|
|
|
(338
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net
|
|
$
|
8,874
|
|
|
$
|
7,642
|
|
|
$
|
7,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2015, 2014 and 2013, the Bank recorded recovery and additional (impairment) of approximately $(59,000), $51,000 and $635,000, respectively.
Note 11 – Goodwill and Intangible Assets
On July 1, 2015, the Peoples acquisition resulted in goodwill of $21.4 million. Additionally, on April 3, 2014, the Summit acquisition resulted in goodwill of $8.4 million.
90
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
No impairment loss was recorded in 2015 or 2014. The Company tested goodwill for impairment during 2015 and 2014. In both valuations, the fair value exceeded the Company’s carrying value, therefore, it was concluded goodwill is not impaired. For additional details related to impairment testing, see the “Goodwill and Intangible Assets” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10K.
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Balance, January 1
|
|
$
|
28,176
|
|
|
$
|
19,748
|
|
Goodwill acquired
|
|
|
21,424
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
49,600
|
|
|
$
|
28,176
|
|
|
|
|
|
|
|
|
|
|
As a result of the acquisition of Alliance Bank Corporation in 2005, American Trust & Savings Bank in 2010, Heartland in 2012, Summit in 2014 and Peoples in 2015, the Company has recorded certain amortizable intangible assets related to core deposit intangibles. The core deposit intangible is being amortized over seven to ten years using an accelerated method. Amortizable intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortizable intangible assets Core deposit intangible
|
|
$
|
12,920
|
|
|
$
|
(5,549
|
)
|
|
$
|
8,526
|
|
|
$
|
(4,561
|
)
|
Amortization expense for intangible assets totaled $988,000, $880,000, and $760,000 for the years ended December 31, 2015, 2014 and 2013. Estimated amortization for the years ending December 31 is as follows:
|
|
|
|
|
2016
|
|
$
|
1,106
|
|
2017
|
|
|
1,103
|
|
2018
|
|
|
1,101
|
|
2019
|
|
|
959
|
|
2020
|
|
|
662
|
|
Thereafter
|
|
|
2,440
|
|
|
|
|
|
|
|
|
$
|
7,371
|
|
|
|
|
|
|
Note 12 – Deposits
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Noninterest-bearing demand deposits
|
|
$
|
335,955
|
|
|
$
|
267,667
|
|
Interest-bearing demand deposits
|
|
|
706,739
|
|
|
|
606,609
|
|
Money market (variable rate)
|
|
|
231,956
|
|
|
|
179,142
|
|
Savings deposits
|
|
|
238,956
|
|
|
|
144,831
|
|
Certificates of deposit of $250,000 or more
|
|
|
67,697
|
|
|
|
137,147
|
|
Other certificates and time deposits
|
|
|
298,850
|
|
|
|
146,923
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,880,153
|
|
|
$
|
1,482,319
|
|
|
|
|
|
|
|
|
|
|
91
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Certificates and other time deposits for both retail and brokered maturing in years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
Brokered
|
|
|
Total
|
|
2016
|
|
$
|
158,389
|
|
|
$
|
9,402
|
|
|
$
|
167,791
|
|
2017
|
|
|
77,857
|
|
|
|
5,677
|
|
|
|
83,534
|
|
2018
|
|
|
40,422
|
|
|
|
1,250
|
|
|
|
41,672
|
|
2019
|
|
|
32,038
|
|
|
|
—
|
|
|
|
32,038
|
|
2020
|
|
|
24,840
|
|
|
|
—
|
|
|
|
24,840
|
|
Thereafter
|
|
|
11,018
|
|
|
|
5,654
|
|
|
|
16,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,564
|
|
|
$
|
21,983
|
|
|
$
|
366,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 – Borrowings
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Federal Home Loan Bank advances, variable and fixed rates ranging from 0.45% to 7.53%, due at various dates through November 15, 2024
|
|
$
|
158,948
|
|
|
$
|
116,473
|
|
Securities sold under agreements to repurchase
|
|
|
154,399
|
|
|
|
139,725
|
|
Federal funds purchased
|
|
|
136,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
449,347
|
|
|
$
|
351,198
|
|
|
|
|
|
|
|
|
|
|
The Federal Home Loan Bank advances are secured by first and second mortgage loans and mortgage warehouse loans totaling approximately $404.3 million. Advances are subject to restrictions or penalties in the event of prepayment.
At December 31, 2015, the Bank had available approximately $253.2 million in credit lines with various money center banks, including the FHLB.
Contractual maturities in years ending December 31 are as follows:
|
|
|
|
|
2016
|
|
$
|
298,235
|
|
2017
|
|
|
48,948
|
|
2018
|
|
|
28,541
|
|
2019
|
|
|
56,777
|
|
2020
|
|
|
11,598
|
|
Thereafter
|
|
|
5,248
|
|
|
|
|
|
|
|
|
$
|
449,347
|
|
|
|
|
|
|
Note 14 – 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 remain under the Bank’s control.
92
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table shows repurchase agreements accounted for as secured borrowings (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
|
Overnight
and
Continuous
|
|
|
Up to one
year
|
|
|
One to three
years
|
|
|
Three to
five years
|
|
|
Five to ten
years
|
|
|
Beyond ten
years
|
|
|
Total
|
|
Repurchase Agreements and repurchase-to-maturity transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
59,399
|
|
|
$
|
—
|
|
|
$
|
35,000
|
|
|
$
|
60,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
|
5,468
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,468
|
|
Federal agency collateralized mortgage obligations
|
|
|
45,975
|
|
|
|
—
|
|
|
|
609
|
|
|
|
213
|
|
|
|
19,063
|
|
|
|
33,314
|
|
|
|
99,174
|
|
Federal agency mortgage-backed pools
|
|
|
14,068
|
|
|
|
—
|
|
|
|
235
|
|
|
|
310
|
|
|
|
15,881
|
|
|
|
35,641
|
|
|
|
66,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
65,511
|
|
|
|
—
|
|
|
|
844
|
|
|
|
523
|
|
|
|
34,944
|
|
|
|
68,955
|
|
|
|
170,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
(6,112
|
)
|
|
$
|
—
|
|
|
$
|
34,156
|
|
|
$
|
59,477
|
|
|
$
|
(34,944
|
)
|
|
$
|
(68,955
|
)
|
|
$
|
(16,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of recognized liabilities for repurchase agreements and securities lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations and federal agency mortgage-backed pools and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 2015 and 2014 totaled $156.2 million and $144.3 million and the daily average of such agreements totaled $149.9 million and $140.9 million. The agreements at December 31, 2015, mature at various dates through September 13, 2020.
Note 15 – Subordinated Debentures
In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory business trust. Trust II sold $10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.95% (2.56% at December 31, 2015) and mature on October 21, 2034, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $17,500 were capitalized and were amortized to the October 31, 2009, first call date of the securities.
In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned statutory business trust. Trust III sold $12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.65% (2.26% at December 31, 2015) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $12,647 were capitalized and are being amortized to the first call date of the securities.
The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust (Alliance Trust), to sell $5.2 million
93
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 2.65% (3.26% at December 31, 2015) and mature in June 2034, and securities may be called at any quarterly interest payment date at par.
The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (Am Tru Trust), to sell $3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 2.85% (3.46% at December 31, 2015) and mature in March 2034, and securities may be called at any quarterly interest payment date at par. The carrying value was $3.1 million, net of the remaining purchase discount, at December 31, 2015.
The Company assumed additional debentures as the result of the Heartland merger in July 2012. In December 2006, Heartland formed Heartland (IN) Statutory Trust II a wholly owned business trust (Heartland Trust), to sell $3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 1.67% (2.28% at December 31, 2015) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $1.7 million, net of the remaining purchase discount, at December 31, 2015.
The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense.
Note 16 – Employee Stock Ownership Plan
Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership plan (“ESOP”). Prior to that date, Horizon maintained an employee stock bonus plan that covered substantially all employees. The stock bonus plan was noncontributory, and Horizon made matching contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an ESOP that was terminated in 1999. The prior ESOP accounts of active employees and the discretionary accounts of active employees remain in the new ESOP. The Matching contribution accounts under the stock bonus plan were transferred to the Employees Thrift Plan.
The ESOP exists for the benefit of substantially all employees. Contributions to the ESOP are by Horizon and are determined by the Board of Directors at its discretion. The contributions may be made in the form of cash or common stock. Shares are allocated among participants each December 31 on the basis of each participant’s eligible compensation to total eligible compensation. Eligible compensation is limited to $265,000 for each participant. Dividends on shares held by the plan, at the discretion of each participant, may be distributed to an individual participant or left in the plan to purchase additional shares.
Total cash contributions and expense recorded for the ESOP was $450,000 in 2015, $400,000 in 2014 and $475,000 in 2013.
The ESOP, which is not leveraged, owns a total of 763,303 shares of Horizon’s stock or 6.4% of the outstanding shares.
94
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 17 – Employee Thrift and Defined Benefit Plan
The Employee Thrift Plan (“Plan”) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times. The Bank’s expense related to the Plan totaled approximately $848,000 in 2015, $633,000 in 2014 and $545,000 in 2013.
The Plan owns a total of 319,994 shares of Horizon’s stock or 2.7% of the outstanding shares.
The Company acquired a pension fund known as the Pentegra Defined Benefit Plan (Pentegra Plan) in the Peoples acquisition. Prior to August 1, 2007, the Peoples provided pension benefits for substantially all of its employees through its participation in the Pentegra Plan. Peoples chose to freeze the Pentegra Plan effective August 1, 2007. The trustees of the Financial Institutions Retirement Fund administer the Pentegra Plan, employer identification number 13-5645888 and plan number 333. This plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra Plan. The Pentegra Plan is a single plan under Internal Revenue Code 413(c) and, as a result, all of the assets stand behind all of the liabilities.
The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
If the Company chooses to stop participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
There was no expense to the Company in 2015 for this Pentegra Plan. The Company intends on terminating this Pentegra Plan and as part of the acquisition Peoples recorded a $4.5 million withdrawal liability which carried over to the Company for the termination of the Pentegra Plan.
95
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 18 – Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
|
December 31
2013
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,270
|
|
|
$
|
4,710
|
|
|
$
|
3,900
|
|
State
|
|
|
241
|
|
|
|
(149
|
)
|
|
|
(88
|
)
|
Deferred
|
|
|
1,721
|
|
|
|
1,594
|
|
|
|
3,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
7,232
|
|
|
$
|
6,155
|
|
|
$
|
7,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of federal statutory to actual tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax at 35%
|
|
$
|
9,724
|
|
|
$
|
8,488
|
|
|
$
|
9,424
|
|
Tax exempt interest
|
|
|
(1,708
|
)
|
|
|
(1,628
|
)
|
|
|
(1,517
|
)
|
Tax exempt income
|
|
|
(488
|
)
|
|
|
(366
|
)
|
|
|
(362
|
)
|
Other tax exempt income
|
|
|
(199
|
)
|
|
|
(309
|
)
|
|
|
(342
|
)
|
Nondeductible and other
|
|
|
(97
|
)
|
|
|
(30
|
)
|
|
|
(176
|
)
|
Effect of state income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
7,232
|
|
|
$
|
6,155
|
|
|
$
|
7,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
5,329
|
|
|
$
|
5,680
|
|
Net operating loss (from acquisitions)
|
|
|
1,679
|
|
|
|
3,509
|
|
Director and employee benefits
|
|
|
2,223
|
|
|
|
1,953
|
|
Unrealized loss on AFS securities and fair value hedge
|
|
|
711
|
|
|
|
588
|
|
Accrued Pension
|
|
|
1,725
|
|
|
|
—
|
|
Other
|
|
|
1,029
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
12,696
|
|
|
|
12,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,180
|
)
|
|
|
(1,563
|
)
|
Difference in expense recognition
|
|
|
—
|
|
|
|
—
|
|
State tax
|
|
|
(192
|
)
|
|
|
(126
|
)
|
Federal Home Loan Bank stock dividends
|
|
|
(343
|
)
|
|
|
(200
|
)
|
Difference in basis of intangible assets
|
|
|
(2,938
|
)
|
|
|
(2,839
|
)
|
FHLB Penalty
|
|
|
(123
|
)
|
|
|
(283
|
)
|
Other
|
|
|
(1,671
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(7,447
|
)
|
|
|
(6,314
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,249
|
|
|
$
|
6,012
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, the Company had approximately $17.3 million of state tax loss carryforward available to offset future franchise taxable income. Also, at December 31, 2015, the Company had approximately $1.6 million of federal loss carryforward available to offset future federal income tax. The state loss carryforward began to expire in 2024. The federal loss carryforward expires in 2029. Due to these losses being incurred by Peoples, Heartland and Summit prior to the acquisitions by Horizon, the annual losses which can be used are subject to an annual limitation. Management believes that the Company will be able to utilize the benefits recorded for both state and federal loss carryforwards within the allotted time periods.
The Company files income tax returns in the U.S. federal jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2012.
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H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 19 – Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) included in capital are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Unrealized gain on securities available for sale
|
|
$
|
920
|
|
|
$
|
4,018
|
|
Unamortized gain on securities held to maturity, previously transferred from AFS
|
|
|
1,109
|
|
|
|
1,658
|
|
Unrealized loss on derivative instruments
|
|
|
(3,142
|
)
|
|
|
(3,337
|
)
|
Tax effect
|
|
|
390
|
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(723
|
)
|
|
$
|
1,521
|
|
|
|
|
|
|
|
|
|
|
Note 20 – Commitments, Off-Balance Sheet Risk and Contingencies
Because of the nature of its activities, Horizon 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 operations and cash flows of the Company.
The Bank was required to have approximately $126,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2015. These balances are included in cash and cash equivalents and do not earn interest.
The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements.
At December 31, 2015 and 2014, commitments to make loans amounted to approximately $468.8 million and $408.6 million and commitments under outstanding standby letters of credit amounted to approximately $3.6 million and $3.9 million. Since many commitments to make loans and standby letters of credit expire without being used, the amount does not necessarily represent future cash advances. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation.
Note 21 – 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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and 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 Company and 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 Company and 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 December 31, 2015, Basel III rules require the Company and Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in
97
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H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
the regulation) to risk-weighted assets (as defined). Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.
To be categorized as well capitalized, the Company and Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (December 31, 2015) and Tier I leverage ratios as set forth in the table below. As of December 31, 2015 and December 31, 2014, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the year ending of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.
Horizon and the Bank’s actual and required capital ratios as of December 31, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Required For Capital
1
Adequacy Purposes
|
|
|
Well Capitalized Under Prompt
1
Corrective Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
1
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
264,452
|
|
|
|
13.99
|
%
|
|
$
|
151,223
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
237,348
|
|
|
|
12.57
|
%
|
|
|
151,057
|
|
|
|
8.00
|
%
|
|
$
|
188,821
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital
1
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
249,918
|
|
|
|
13.22
|
%
|
|
|
113,427
|
|
|
|
6.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
222,814
|
|
|
|
11.80
|
%
|
|
|
113,295
|
|
|
|
6.00
|
%
|
|
|
151,060
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
Common equity tier 1 capital
1
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
204,350
|
|
|
|
10.81
|
%
|
|
|
85,067
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
222,814
|
|
|
|
11.80
|
%
|
|
|
84,971
|
|
|
|
4.50
|
%
|
|
|
122,737
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
Tier 1 capital
1
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
249,918
|
|
|
|
9.82
|
%
|
|
|
101,800
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
222,814
|
|
|
|
8.77
|
%
|
|
|
101,626
|
|
|
|
4.00
|
%
|
|
|
127,032
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
As of December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
1
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
212,276
|
|
|
|
14.48
|
%
|
|
$
|
117,280
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
192,604
|
|
|
|
13.08
|
%
|
|
|
117,801
|
|
|
|
8.00
|
%
|
|
$
|
147,251
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital
1
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
195,775
|
|
|
|
13.35
|
%
|
|
|
58,659
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
176,103
|
|
|
|
11.96
|
%
|
|
|
58,897
|
|
|
|
4.00
|
%
|
|
|
88,346
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital
1
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
195,775
|
|
|
|
9.76
|
%
|
|
|
80,236
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
176,103
|
|
|
|
8.80
|
%
|
|
|
80,047
|
|
|
|
4.00
|
%
|
|
|
100,059
|
|
|
|
5.00
|
%
|
1
|
As defined by regulatory agencies
|
Note 22 – Share-Based Compensation
On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (“2003 Plan”), which was approved by stockholders on May 8, 2003. Under the 2003 Plan, Horizon could issue up to 337,500 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan limited the number of shares available to 337,500 for incentive stock options and to 168,750 for the grant of non-option awards. The shares available for issuance under the 2003 Plan could be divided among the various types of
98
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
awards and among the participants as the Compensation Committee (“Committee”) determines. The Committee was authorized to grant any type of award to a participant that was consistent with the provisions of the 2003 Plan. Awards could consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determined the provisions, terms and conditions of each award. The restricted shares vest over a period of time established by the Committee at the time of each grant. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period. The options shares granted under the 2003 plan vest at a rate designated per the individual agreements. The restricted shares granted under the 2003 Plan vest at the end of each grant’s vesting period. On March 8, 2010, the Board of Directors adopted, and on May 6, 2010, the stockholders approved, an amendment to the 2003 Omnibus Equity Incentive Plan making an additional 393,750 common shares available for issuance.
A summary of option activity under the 2003 Plan as of December 31, 2015, and changes during the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, beginning of year
|
|
|
77,947
|
|
|
$
|
11.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(33,347
|
)
|
|
|
11.63
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(600
|
)
|
|
|
16.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
44,000
|
|
|
|
11.07
|
|
|
|
4.02
|
|
|
$
|
743,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
41,750
|
|
|
|
10.85
|
|
|
|
3.90
|
|
|
|
714,286
|
|
On June 18, 2013, the Board of Directors adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (“2013 Plan”), which was approved by the Company’s shareholders on May 8, 2014. Under the 2013 Plan, Horizon may issue up to 691,700 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2013 Plan limits the number of shares available to 100,000 for incentive stock options and to 400,000 for the grant of non-option awards. The shares available for issuance under the 2013 Plan may be divided among the various types of awards and among the participants as the Committee determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2013 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award.
The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2013 Plan generally vest at the end of each grant’s vesting period. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period.
The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $1 billion and $5 billion on the SNL Bank Index. Holders of performance share awards receive pass-through dividends but do not have any voting rights before the performance shares are earned and vested.
99
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The options shares granted under the 2013 Plan vest at a rate designated per the individual agreements
The fair value of options granted is estimated on the date of the grant using an option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Dividend yields
|
|
|
2.35
|
%
|
|
|
2.01
|
%
|
|
|
1.98
|
%
|
Volatility factors of expected market price of common stock
|
|
|
28.97
|
%
|
|
|
29.54
|
%
|
|
|
29.75
|
%
|
Risk-free interest rates
|
|
|
2.10
|
%
|
|
|
2.66
|
%
|
|
|
2.16
|
%
|
Expected life of options
|
|
|
8 years
|
|
|
|
8 years
|
|
|
|
8 years
|
|
A summary of option activity under the 2013 Plan as of December 31, 2015, and changes during the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, beginning of year
|
|
|
84,147
|
|
|
$
|
21.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
39,944
|
|
|
|
23.83
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(666
|
)
|
|
|
20.24
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,334
|
)
|
|
|
22.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
121,091
|
|
|
|
22.08
|
|
|
|
8.28
|
|
|
$
|
712,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
41,412
|
|
|
|
20.90
|
|
|
|
7.71
|
|
|
|
292,263
|
|
The weighted average grant-date fair value of options granted during the years 2015, 2014 and 2013 was $6.14, $6.50 and $5.74.
A summary of the status of Horizon’s non-vested restricted and performance shares as of December 31, 2015 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested beginning of year
|
|
|
84,757
|
|
|
$
|
15.18
|
|
|
|
|
Vested
|
|
|
(25,059
|
)
|
|
|
14.09
|
|
Granted
|
|
|
25,001
|
|
|
|
23.83
|
|
Forfeited
|
|
|
(2,316
|
)
|
|
|
16.64
|
|
|
|
|
|
|
|
|
|
|
Non-vested, end of year
|
|
|
82,383
|
|
|
|
18.19
|
|
|
|
|
|
|
|
|
|
|
Grants vest at the end of three, four or five years of continuous employment.
Total compensation cost recognized in the income statement for option-based payment arrangements during 2015 was $288,000 and the related tax benefit recognized was approximately $101,000. Total compensation cost recognized in the income statement for option-based payment arrangements during 2014 and 2013 was $203,000 and $48,000 and the related tax benefit recognized was $71,000 and $19,000, respectively.
100
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H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Total compensation cost recognized in the income statement for restricted share and performance share based payment arrangements during 2015, 2014 and 2013 was $355,000, $363,000, and $288,000. The recognized tax benefit related thereto was approximately $124,000, $127,000, and $115,000 for the years ended December 31, 2015, 2014 and 2013.
Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2015, 2014 and 2013 was $403,000, $122,000, and $136,000. The actual tax benefit realized for the tax deductions from option exercise of the
share-based
payment arrangements totaled $151,000, $43,000, and $58,000, for the years ended December 31, 2015, 2014 and 2013.
As of December 31, 2015, there was $983,000 of total unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted-average period of 1.5 years.
Note 23 – Derivative Financial Instruments
Cash Flow Hedges
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at December 31, 2015 and $30.5 million at December 31, 2014. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At December 31, 2015, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.
Fair Value Hedges
Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At December 31, 2015, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.
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 $117.3 million at December 31, 2015 and $102.7 million at December 31, 2014.
101
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H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 December 31, 2015, the Company’s fair values of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
December 31, 2015
|
|
|
Liability Derivatives
December 31, 2015
|
|
Derivatives designated as hedging instruments (Unaudited)
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Interest rate contracts
|
|
Loans
|
|
$
|
—
|
|
|
Other liabilities
|
|
$
|
1,782
|
|
Interest rate contracts
|
|
Other Assets
|
|
|
1,782
|
|
|
Other liabilities
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
1,782
|
|
|
|
|
|
4,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan contracts
|
|
Other assets
|
|
|
642
|
|
|
Other liabilities
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
642
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
2,424
|
|
|
|
|
$
|
4,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
December 31, 2014
|
|
|
Liability Derivatives
December 31, 2014
|
|
Derivatives designated as hedging instruments (Unaudited)
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Interest rate contracts
|
|
Loans
|
|
$
|
—
|
|
|
Other liabilities
|
|
$
|
1,208
|
|
Interest rate contracts
|
|
Other Assets
|
|
|
1,208
|
|
|
Other liabilities
|
|
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
1,208
|
|
|
|
|
|
4,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan contracts
|
|
Other assets
|
|
|
447
|
|
|
Other liabilities
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
447
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
1,655
|
|
|
|
|
$
|
4,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the derivative instruments on the consolidated statement of income for the 12-month periods ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in Other Comprehensive
Income on Derivative (Effective Portion)
Years Ended December 31
|
|
Derivative in cash flow hedging relationship
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Interest rate contracts
|
|
$
|
127
|
|
|
$
|
(332
|
)
|
|
$
|
1,734
|
|
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.
102
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized on Derivative
|
|
|
|
Location of gain (loss)
|
|
Years Ended December 31
|
|
Derivative in fair value hedging relationship
|
|
recognized on derivative
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Interest rate contracts
|
|
Interest income - loans
|
|
$
|
574
|
|
|
$
|
1,261
|
|
|
$
|
(2,267
|
)
|
Interest rate contracts
|
|
Interest income - loans
|
|
|
(574
|
)
|
|
|
(1,261
|
)
|
|
|
2,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized on Derivative
|
|
|
|
Location of gain (loss)
|
|
Years Ended December 31
|
|
Derivative not designated as hedging relationship
|
|
recognized on derivative
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Mortgage contracts
|
|
Other income - gain
on sale of loans
|
|
$
|
195
|
|
|
$
|
256
|
|
|
$
|
(667
|
)
|
Note 24 – 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 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 December 31, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available for sale securities
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.
103
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for 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 financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
5,926
|
|
|
$
|
—
|
|
|
$
|
5,926
|
|
|
$
|
—
|
|
State and municipal
|
|
|
75,095
|
|
|
|
—
|
|
|
|
75,095
|
|
|
|
—
|
|
Federal agency collateralized mortgage obligations
|
|
|
156,203
|
|
|
|
—
|
|
|
|
156,203
|
|
|
|
—
|
|
Federal agency mortgage-backed pools
|
|
|
207,704
|
|
|
|
—
|
|
|
|
207,704
|
|
|
|
—
|
|
Corporate notes
|
|
|
54
|
|
|
|
—
|
|
|
|
54
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
444,982
|
|
|
|
—
|
|
|
|
444,982
|
|
|
|
—
|
|
|
|
|
|
|
Hedged loans
|
|
|
115,472
|
|
|
|
—
|
|
|
|
115,472
|
|
|
|
—
|
|
Forward sale commitments
|
|
|
642
|
|
|
|
—
|
|
|
|
642
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
(4,923
|
)
|
|
|
—
|
|
|
|
(4,923
|
)
|
|
|
—
|
|
Commitments to originate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
$
|
26,823
|
|
|
$
|
—
|
|
|
$
|
26,823
|
|
|
$
|
—
|
|
State and municipal
|
|
|
47,952
|
|
|
|
—
|
|
|
|
47,952
|
|
|
|
—
|
|
Federal agency collateralized mortgage obligations
|
|
|
122,860
|
|
|
|
—
|
|
|
|
122,860
|
|
|
|
—
|
|
Federal agency mortgage-backed pools
|
|
|
125,395
|
|
|
|
—
|
|
|
|
125,395
|
|
|
|
—
|
|
Private labeled mortgage-backed pools
|
|
|
689
|
|
|
|
—
|
|
|
|
689
|
|
|
|
—
|
|
Corporate notes
|
|
|
45
|
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
323,764
|
|
|
|
—
|
|
|
|
323,764
|
|
|
|
—
|
|
|
|
|
|
|
Hedged loans
|
|
|
101,445
|
|
|
|
—
|
|
|
|
101,445
|
|
|
|
—
|
|
Forward sale commitments
|
|
|
447
|
|
|
|
—
|
|
|
|
447
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
(4,547
|
)
|
|
|
—
|
|
|
|
(4,547
|
)
|
|
|
—
|
|
104
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Realized gains and losses included in net income for the periods are reported in the consolidated statements of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Interest Income
|
|
Years Ended December 31
|
|
Total gains and losses from:
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Hedged loans
|
|
$
|
574
|
|
|
$
|
1,261
|
|
|
$
|
(2,267
|
)
|
Fair value interest rate swap agreements
|
|
|
(574
|
)
|
|
|
(1,261
|
)
|
|
|
2,267
|
|
Derivative loan commitments
|
|
|
195
|
|
|
|
256
|
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
195
|
|
|
$
|
256
|
|
|
$
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,803
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,803
|
|
Mortgage servicing rights
|
|
|
8,874
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,874
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,464
|
|
Mortgage servicing rights
|
|
|
7,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,642
|
|
Impaired (collateral dependent):
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Mortgage Servicing Rights (MSRs):
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs were reduced by $397,000 in 2015 and $338,000 in 2014 for the fair value.
105
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
December 31, 2015
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,803
|
|
|
Collateral based
measurement
|
|
Discount to reflect current
market conditions and
ultimate collectability
|
|
10% - 15% (12%)
|
Mortgage servicing rights
|
|
$
|
8,874
|
|
|
Discounted
cashflows
|
|
Discount rate, Constant
prepayment rate,
Probability of default
|
|
10% - 15% (12%),
4% - 7%
(4.6%),
1% - 10%
(4.5%)
|
|
|
|
|
|
|
|
Fair Value at
December 31, 2014
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,464
|
|
|
Collateral based
measurement
|
|
Discount to reflect current
market conditions and
ultimate collectability
|
|
10%
- 15% (12%)
|
Mortgage servicing rights
|
|
$
|
7,642
|
|
|
Discounted
cashflows
|
|
Discount rate, Constant
prepayment rate,
Probability of default
|
|
10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
|
Note 25 – 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 December 31, 2015 and December 31, 2014. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities which are not financial instruments as defined by the FASB ASC fair value hierarchy.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due from Banks
— The carrying amounts approximate fair value.
Held-to-Maturity Securities
— For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.
Loans Held for Sale
— The carrying amounts approximate fair value.
Net Loans
— The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.
106
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H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
48,650
|
|
|
$
|
48,650
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities, held to maturity
|
|
|
187,629
|
|
|
|
—
|
|
|
|
193,703
|
|
|
|
—
|
|
Loans held for sale
|
|
|
7,917
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,917
|
|
Loans excluding loan level hedges, net
|
|
|
1,619,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,703,506
|
|
Stock in FHLB and FRB
|
|
|
13,823
|
|
|
|
—
|
|
|
|
13,823
|
|
|
|
—
|
|
Interest receivable
|
|
|
10,535
|
|
|
|
—
|
|
|
|
10,535
|
|
|
|
—
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
335,955
|
|
|
$
|
335,955
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing deposits
|
|
|
1,544,198
|
|
|
|
—
|
|
|
|
1,461,314
|
|
|
|
—
|
|
Borrowings
|
|
|
449,347
|
|
|
|
—
|
|
|
|
441,547
|
|
|
|
—
|
|
Subordinated debentures
|
|
|
32,797
|
|
|
|
—
|
|
|
|
32,996
|
|
|
|
—
|
|
Interest payable
|
|
|
507
|
|
|
|
—
|
|
|
|
507
|
|
|
|
—
|
|
107
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
43,476
|
|
|
$
|
43,476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities, held to maturity
|
|
|
165,767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
169,904
|
|
Loans held for sale
|
|
|
6,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,143
|
|
Loans excluding loan level hedges, net
|
|
|
1,260,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,295,133
|
|
Stock in FHLB and FRB
|
|
|
11,348
|
|
|
|
—
|
|
|
|
11,348
|
|
|
|
—
|
|
Interest receivable
|
|
|
8,246
|
|
|
|
—
|
|
|
|
8,246
|
|
|
|
—
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
267,667
|
|
|
$
|
267,667
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing deposits
|
|
|
1,214,652
|
|
|
|
—
|
|
|
|
1,158,912
|
|
|
|
—
|
|
Borrowings
|
|
|
351,198
|
|
|
|
—
|
|
|
|
348,597
|
|
|
|
—
|
|
Subordinated debentures
|
|
|
32,642
|
|
|
|
—
|
|
|
|
32,669
|
|
|
|
—
|
|
Interest payable
|
|
|
497
|
|
|
|
—
|
|
|
|
497
|
|
|
|
—
|
|
Note 26 – Subsequent Events
On February 1, 2016, Horizon Bancorp (“Horizon”) completed the redemption (the “Redemption”) of all 12,500 outstanding shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “SBLF Preferred Stock”) which were held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund (“SBLF”). The SBLF Preferred Stock was redeemed at its liquidation value of $1,000 per share, plus accrued dividends, for a total Redemption price of $12,510,416.67. Horizon funded the Redemption using cash on hand without borrowing and without a special dividend from its wholly owned banking subsidiary, Horizon Bank, N.A. Following the Redemption, Horizon does not have any shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series B outstanding. The Redemption terminates Horizon’s participation in the SBLF.
On February 4, 2016, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”). Pursuant to the Merger Agreement, Kosciusko would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Farmers State Bank, a state chartered bank and wholly-owned subsidiary of Kosciusko, would merge with and into a wholly-owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.
The boards of directors of each of Horizon and Kosciusko have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Kosciusko shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger during the second quarter of 2016.
In connection with the Merger, shareholders of Kosciusko will have the option to receive $81.75 per share in cash or 3.0122 shares of Horizon common stock for each share of Kosciusko’s common stock or a combination thereof, provided the overall shares exchanged consist of 65% stock and 35% cash. Based upon the February 3, 2016, closing price of $23.99 per share of Horizon common stock, the transaction has an implied valuation of approximately $22.5 million.
Subject to certain terms and conditions, the board of directors of Kosciusko has agreed to recommend the approval and adoption of the Merger Agreement to the Kosciusko shareholders and will solicit proxies voting in favor of the Merger from Kosciusko’s shareholders.
108
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The Merger Agreement also provides for certain termination rights for both Horizon and Kosciusko, and further provides that upon termination of the Merger Agreement under certain circumstances, Kosciusko will be obligated to pay Horizon a termination fee.
As of December 31, 2015, Kosciusko reported total assets of approximately $148.2 million, total deposits of approximately $122.8 million and total loans of approximately $106.1 million.
Note 27 – General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results or operation and cash flows of the Company.
Note 28 – Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp:
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
2015
|
|
|
December 31
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
26,507
|
|
|
$
|
19,195
|
|
Investment in Bank
|
|
|
276,718
|
|
|
|
211,928
|
|
Other assets
|
|
|
3,392
|
|
|
|
2,758
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
306,617
|
|
|
$
|
233,881
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
32,797
|
|
|
$
|
32,642
|
|
Other liabilities
|
|
|
6,988
|
|
|
|
6,825
|
|
Stockholders’ Equity
|
|
|
266,832
|
|
|
|
194,414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
306,617
|
|
|
$
|
233,881
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Operating Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income from Bank
|
|
$
|
30,470
|
|
|
$
|
12,500
|
|
|
$
|
7,500
|
|
Investment income
|
|
|
15
|
|
|
|
12
|
|
|
|
4
|
|
Other income
|
|
|
24
|
|
|
|
17
|
|
|
|
175
|
|
Interest expense
|
|
|
(2,009
|
)
|
|
|
(2,009
|
)
|
|
|
(2,010
|
)
|
Employee benefit expense
|
|
|
(1,093
|
)
|
|
|
(965
|
)
|
|
|
(811
|
)
|
Other expense
|
|
|
910
|
|
|
|
883
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Undistributed Income of Subsidiaries
|
|
|
28,317
|
|
|
|
10,438
|
|
|
|
5,504
|
|
Undistributed Income of Subsidiaries
|
|
|
(8,168
|
)
|
|
|
6,814
|
|
|
|
13,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Tax
|
|
|
20,149
|
|
|
|
17,252
|
|
|
|
18,648
|
|
Income Tax Benefit
|
|
|
400
|
|
|
|
849
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
20,549
|
|
|
|
18,101
|
|
|
|
19,876
|
|
Preferred stock dividend
|
|
|
(125
|
)
|
|
|
(133
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
20,424
|
|
|
$
|
17,968
|
|
|
$
|
19,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Net Income
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments, net of taxes
|
|
|
127
|
|
|
|
(332
|
)
|
|
|
1,734
|
|
Unrealized appreciation for the period on held-to-maturity securities, net of taxes
|
|
|
(357
|
)
|
|
|
1,078
|
|
|
|
—
|
|
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes
|
|
|
(1,891
|
)
|
|
|
3,146
|
|
|
|
(12,320
|
)
|
Less: reclassification adjustment for realized gains included in net income, net of taxes
|
|
|
(123
|
)
|
|
|
(642
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,244
|
)
|
|
|
3,250
|
|
|
|
(10,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
18,305
|
|
|
$
|
21,351
|
|
|
$
|
9,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,549
|
|
|
$
|
18,101
|
|
|
$
|
19,876
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries
|
|
|
8,168
|
|
|
|
(6,814
|
)
|
|
|
(13,144
|
)
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
288
|
|
|
|
203
|
|
|
|
48
|
|
Amortization of unearned compensation
|
|
|
355
|
|
|
|
363
|
|
|
|
288
|
|
Other assets
|
|
|
(634
|
)
|
|
|
906
|
|
|
|
(167
|
)
|
Other liabilities
|
|
|
(13
|
)
|
|
|
1,377
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28,713
|
|
|
|
14,136
|
|
|
|
6,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Summit
|
|
|
—
|
|
|
|
(7,036
|
)
|
|
|
—
|
|
Acquisition of Peoples
|
|
|
(19,365
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,365
|
)
|
|
|
(7,036
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred shares
|
|
|
(125
|
)
|
|
|
(133
|
)
|
|
|
(370
|
)
|
Dividends paid on common shares
|
|
|
(6,216
|
)
|
|
|
(4,744
|
)
|
|
|
(3,655
|
)
|
Exercise of stock options
|
|
|
4,305
|
|
|
|
165
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,036
|
)
|
|
|
(4,712
|
)
|
|
|
(3,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
7,312
|
|
|
|
2,388
|
|
|
|
3,168
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
19,195
|
|
|
|
16,807
|
|
|
|
13,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
26,507
|
|
|
$
|
19,195
|
|
|
$
|
16,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
Table of Contents
H
ORIZON
B
ANCORP
AND
S
UBSIDIARIES
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 29 – Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2015
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
Interest income
|
|
$
|
20,093
|
|
|
$
|
21,127
|
|
|
$
|
23,578
|
|
|
$
|
23,790
|
|
Interest expense
|
|
|
3,207
|
|
|
|
3,277
|
|
|
|
3,802
|
|
|
|
3,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,886
|
|
|
|
17,850
|
|
|
|
19,776
|
|
|
|
20,222
|
|
Provision for loan losses
|
|
|
614
|
|
|
|
1,906
|
|
|
|
300
|
|
|
|
342
|
|
Gain on sale of securities
|
|
|
124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65
|
|
Net income
|
|
|
5,358
|
|
|
|
4,728
|
|
|
|
4,288
|
|
|
|
6,175
|
|
Net income available to common shareholders
|
|
$
|
5,327
|
|
|
$
|
4,697
|
|
|
$
|
4,257
|
|
|
$
|
6,144
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
$
|
0.37
|
|
|
$
|
0.51
|
|
Diluted
|
|
|
0.55
|
|
|
|
0.49
|
|
|
|
0.36
|
|
|
|
0.51
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,216,011
|
|
|
|
9,240,005
|
|
|
|
11,605,976
|
|
|
|
11,937,247
|
|
Diluted
|
|
|
9,609,506
|
|
|
|
9,637,586
|
|
|
|
11,893,254
|
|
|
|
12,013,743
|
|
|
|
|
|
|
Three Months Ended 2014
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
Interest income
|
|
$
|
16,467
|
|
|
$
|
20,122
|
|
|
$
|
19,851
|
|
|
$
|
19,765
|
|
Interest expense
|
|
|
3,195
|
|
|
|
3,334
|
|
|
|
3,451
|
|
|
|
3,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
13,272
|
|
|
|
16,788
|
|
|
|
16,400
|
|
|
|
16,523
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
339
|
|
|
|
1,741
|
|
|
|
978
|
|
Gain on sale of securities
|
|
|
—
|
|
|
|
—
|
|
|
|
988
|
|
|
|
—
|
|
Net income
|
|
|
3,417
|
|
|
|
4,778
|
|
|
|
4,958
|
|
|
|
4,948
|
|
Net income available to common shareholders
|
|
$
|
3,386
|
|
|
$
|
4,747
|
|
|
$
|
4,918
|
|
|
$
|
4,917
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.52
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
Diluted
|
|
|
0.38
|
|
|
|
0.50
|
|
|
|
0.51
|
|
|
|
0.51
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,630,966
|
|
|
|
9,182,986
|
|
|
|
9,208,707
|
|
|
|
9,212,156
|
|
Diluted
|
|
|
9,021,786
|
|
|
|
9,560,939
|
|
|
|
9,588,332
|
|
|
|
9,628,240
|
|
111
Table of Contents
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana
We have audited the accompanying consolidated balance sheets of Horizon Bancorp as of December 31, 2015 and 2014, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horizon Bancorp as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Horizon Bancorp’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 29, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Indianapolis, Indiana
February 29, 2016
112
Table of Contents
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana
We have audited Horizon Bancorp’s internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Financial Statement. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As permitted, the Company excluded the operations of Peoples Bancorp, acquired on July 1, 2015, from the scope of management’s report on internal control over financial reporting. As such, this entity has also been excluded from the scope of our audit of internal control over financial reporting.
113
Table of Contents
In our opinion, Horizon Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Horizon Bancorp and our report dated February 29, 2016, expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 29, 2016
Table of Contents
Horizon Bancorp
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the consolidated financial statements and related notes on the preceding pages. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management’s best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on Horizon’s system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures.
The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters.
As permitted, the Company excluded the operations of Peoples Bancorp, acquired on July 1, 2015, from the scope of management’s report on internal control over financial reporting. Peoples Bancorp approximated 21% of total consolidated assets of the Company at the acquisition date.
The consolidated financial statements in the Annual Report have been audited by BKD, LLP, independent registered public accounting firm, for 2015, 2014 and 2013. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and included consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
115
Table of Contents
Horizon Bancorp
Summary of Selected Financial Data
(Dollars in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
74,734
|
|
|
$
|
62,983
|
|
|
$
|
61,383
|
|
|
$
|
58,206
|
|
|
$
|
48,113
|
|
Provision for loan losses
|
|
|
3,162
|
|
|
|
3,058
|
|
|
|
1,920
|
|
|
|
3,524
|
|
|
|
5,282
|
|
Non-interest income
|
|
|
30,402
|
|
|
|
26,277
|
|
|
|
25,906
|
|
|
|
27,331
|
|
|
|
20,299
|
|
Non-interest expenses
|
|
|
74,193
|
|
|
|
61,946
|
|
|
|
58,445
|
|
|
|
54,024
|
|
|
|
46,147
|
|
Income tax expense
|
|
|
7,232
|
|
|
|
6,155
|
|
|
|
7,048
|
|
|
|
8,446
|
|
|
|
4,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,549
|
|
|
|
18,101
|
|
|
|
19,876
|
|
|
|
19,543
|
|
|
|
12,797
|
|
Preferred stock dividend
|
|
|
(125
|
)
|
|
|
(133
|
)
|
|
|
(370
|
)
|
|
|
(481
|
)
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
20,424
|
|
|
$
|
17,968
|
|
|
$
|
19,506
|
|
|
$
|
19,062
|
|
|
$
|
11,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared
|
|
$
|
6,216
|
|
|
$
|
4,744
|
|
|
$
|
3,655
|
|
|
$
|
3,047
|
|
|
$
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.94
|
|
|
$
|
1.98
|
|
|
$
|
2.26
|
|
|
$
|
2.39
|
|
|
$
|
1.55
|
|
Diluted earnings per share
|
|
|
1.89
|
|
|
|
1.90
|
|
|
|
2.17
|
|
|
|
2.30
|
|
|
|
1.51
|
|
Cash dividends declared per common share
|
|
|
0.58
|
|
|
|
0.51
|
|
|
|
0.42
|
|
|
|
0.38
|
|
|
|
0.31
|
|
Book value per common share
|
|
|
21.30
|
|
|
|
19.75
|
|
|
|
17.64
|
|
|
|
17.00
|
|
|
|
14.68
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,510,296
|
|
|
|
9,060,702
|
|
|
|
8,619,330
|
|
|
|
7,974,241
|
|
|
|
7,407,258
|
|
Diluted
|
|
|
10,798,208
|
|
|
|
9,454,125
|
|
|
|
9,000,963
|
|
|
|
8,271,177
|
|
|
|
7,588,394
|
|
|
|
|
|
|
|
Period End Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of deferred loan fees and unearned income
|
|
$
|
1,749,131
|
|
|
$
|
1,378,554
|
|
|
$
|
1,068,828
|
|
|
$
|
1,190,717
|
|
|
$
|
983,193
|
|
Allowance for loan losses
|
|
|
14,534
|
|
|
|
16,501
|
|
|
|
15,992
|
|
|
|
18,270
|
|
|
|
18,882
|
|
Total assets
|
|
|
2,652,401
|
|
|
|
2,076,922
|
|
|
|
1,758,276
|
|
|
|
1,848,227
|
|
|
|
1,547,162
|
|
Total deposits
|
|
|
1,880,153
|
|
|
|
1,482,319
|
|
|
|
1,291,520
|
|
|
|
1,294,153
|
|
|
|
1,009,865
|
|
Total borrowings
|
|
|
482,144
|
|
|
|
383,840
|
|
|
|
288,782
|
|
|
|
378,095
|
|
|
|
400,787
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to deposit
|
|
|
93.03
|
%
|
|
|
93.00
|
%
|
|
|
82.76
|
%
|
|
|
92.01
|
%
|
|
|
97.36
|
%
|
Loan to total funding
|
|
|
74.04
|
%
|
|
|
73.87
|
%
|
|
|
67.63
|
%
|
|
|
71.20
|
%
|
|
|
69.70
|
%
|
Return on average assets
|
|
|
0.87
|
%
|
|
|
0.93
|
%
|
|
|
1.13
|
%
|
|
|
1.19
|
%
|
|
|
0.90
|
%
|
Average stockholders’ equity to average total assets
|
|
|
9.30
|
%
|
|
|
9.33
|
%
|
|
|
9.34
|
%
|
|
|
8.63
|
%
|
|
|
8.30
|
%
|
Return on average stockholders’ equity
|
|
|
9.87
|
%
|
|
|
10.60
|
%
|
|
|
12.86
|
%
|
|
|
14.72
|
%
|
|
|
11.20
|
%
|
Dividend payout ratio (dividends divided by net income)
|
|
|
29.85
|
%
|
|
|
25.72
|
%
|
|
|
18.56
|
%
|
|
|
15.90
|
%
|
|
|
20.09
|
%
|
|
|
|
|
|
|
Price to book value ratio
|
|
|
131.26
|
%
|
|
|
132.39
|
%
|
|
|
143.59
|
%
|
|
|
115.61
|
%
|
|
|
78.69
|
%
|
Price to earnings ratio
|
|
|
14.78
|
|
|
|
13.75
|
|
|
|
11.69
|
|
|
|
8.53
|
|
|
|
7.64
|
|
116
Table of Contents
Horizon Bancorp
Horizon’s Common Stock and Related Stockholders Matters
Horizon common stock is traded on the NASDAQ Global Select Market under the symbol “HBNC.” The following table sets forth, for the periods indicated, the high and low prices per share. Also summarized below are the cash dividends declared by quarter for 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Common Stock Prices
|
|
|
Dividends
Declared
Per Share
|
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
25.86
|
|
|
$
|
22.38
|
|
|
$
|
0.14
|
|
Second Quarter
|
|
|
26.03
|
|
|
|
22.85
|
|
|
|
0.14
|
|
Third Quarter
|
|
|
26.15
|
|
|
|
22.60
|
|
|
|
0.15
|
|
Fourth Quarter
|
|
|
28.15
|
|
|
|
23.58
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
Common Stock Prices
|
|
|
Dividends
Declared
Per Share
|
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
24.91
|
|
|
$
|
20.27
|
|
|
$
|
0.11
|
|
Second Quarter
|
|
|
22.58
|
|
|
|
19.57
|
|
|
|
0.13
|
|
Third Quarter
|
|
|
23.67
|
|
|
|
20.65
|
|
|
|
0.13
|
|
Fourth Quarter
|
|
|
26.73
|
|
|
|
22.83
|
|
|
|
0.14
|
|
The approximate number of holders of record of Horizon’s outstanding common stock as of December 31, 2015, was 897.
117
Table of Contents
Horizon Bancorp
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision of and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, Horizon has evaluated the effectiveness of the design and operation of its disclosure controls (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. 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 or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods 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.
Management’s Report on Internal Control Over Financial Reporting
Management of Horizon Bancorp is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Horizon’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Management assessed the effectiveness of Horizon’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth in Internal Control –
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission. Based on this assessment, management has determined that Horizon’s internal control over financial reporting as of December 31, 2015 is effective based on the specified criteria.
Attestation Report of Registered Public Accounting Firm
BKD, LLP, independent registered public accounting firm, has issued an attestation report on management’s assessment of Horizon’s internal control over financial reporting. This report appears on page 113.
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 December 31, 2015, there were 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.
ITEM 9B. OTHER INFORMATION
Not applicable.
118
Table of Contents
Horizon Bancorp
PART III
Certain information is omitted from this report pursuant to General Instruction G. (3) of Form 10-K as Horizon intends to file with the Commission its definitive Proxy Statement for its 2016 Annual Meeting of Shareholders (the “Proxy Statement”) pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 2015.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to Horizon’s directors required by this item is found in the Proxy Statement under “Proposal I — Election of Directors” and is incorporated into this report by reference. The information relating to the Audit Committee of the Board of Directors required by this item is found in the Proxy Statement under “Corporate Governance — Audit Committee” and is incorporated into this report by reference.
The information relating to Horizon’s executive officers required by this item is included in Part I of this Form 10-K under “Special Item: Executive Officers of Registrant” and is incorporated into this report by reference.
The information relating to certain filing obligations of directors and executive officers required by this item is found in the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated into this report by reference.
Horizon’s “Code of Ethics for Officers and Directors” applies to its directors, chief executive officer and chief financial officer. The code is available on Horizon’s website at
http://www.horizonbank.com/
in the section headed “About Use — Investor Relations” under the caption “Corporate Information — Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION
The information on executive and director compensation and compensation committee matters required by this item can be found in the Proxy Statement under “Corporate Governance,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation of Directors” and is incorporated into this report by reference.
119
Table of Contents
Horizon Bancorp
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table presents information regarding grants under all equity compensation plans of Horizon through December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
|
|
|
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
|
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
the First Column)
|
|
Equity compensation plans approved by security holders
|
|
|
165,091
|
|
|
$
|
19.15
|
|
|
|
541,345
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
165,091
|
|
|
$
|
19.15
|
|
|
|
541,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other information required by this item can be found in the Proxy Statement under “Common Share Ownership of Management and Certain Beneficial Owners” and is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is found in the Proxy Statement under “Corporate Governance” and “Certain Business Relationships and Transactions” and is incorporated by reference into this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Proxy Statement section captioned “Auditor Fees and Services.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed As Part of This Annual Report on Form 10-K:
See the Financial Statements included in Item 8.
|
2.
|
Financial Statement Schedules
|
Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.
The exhibits filed as part of this Annual Report on Form 10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits that describe or evidence all management contracts and compensation plans or arrangements required to be filed as exhibits to this Report. Such Exhibit Index is incorporated herein by reference.
120
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Registrant
|
|
|
|
|
Date: February 29, 2016
|
|
|
|
By:
|
|
/s/ Craig M. Dwight
|
|
|
|
|
Craig M. Dwight
|
|
|
|
|
Chairman, President and Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
Date: February 29, 2016
|
|
|
|
By:
|
|
/s/ Mark E. Secor
|
|
|
|
|
Mark E. Secor
|
|
|
|
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Date
|
|
|
|
Signature and Title
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Craig M. Dwight
|
|
|
|
|
Craig M. Dwight, Chairman of the Board, President and Chief Executive Officer and Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Susan D. Aaron
|
|
|
|
|
Susan D. Aaron, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Lawrence E. Burnell
|
|
|
|
|
Lawrence E. Burnell, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ James B. Dworkin
|
|
|
|
|
James B. Dworkin, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Charley E. Gillispie
|
|
|
|
|
Charley E. Gillispie, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Daniel F. Hopp
|
|
|
|
|
Daniel F. Hopp, Director
|
121
Table of Contents
|
|
|
|
|
Date
|
|
|
|
Signature and Title
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Larry N. Middleton
|
|
|
|
|
Larry N. Middleton, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Peter L. Pairitz
|
|
|
|
|
Peter L. Pairitz, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Steven W. Reed
|
|
|
|
|
Steven W. Reed, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Robert E. Swinehart
|
|
|
|
|
Robert E. Swinehart, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Spero W. Valavanis
|
|
|
|
|
Spero W. Valavanis, Director
|
|
|
|
February 29, 2016
|
|
|
|
/s/ Maurice F. Winkler, III
|
|
|
|
|
Maurice F. Winkler, III, Director
|
122
Table of Contents
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated by Reference/Attached
|
|
|
|
3.1
|
|
Articles of Incorporation of Horizon Bancorp, as amended and restated
|
|
Incorporated by reference to Exhibit 3.1 to Registrant’s Form 10-Q for the quarter ended September 30, 2011
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Horizon Bancorp
|
|
Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed April 18, 2013
|
|
|
|
4.1
|
|
Indenture, dated as of October 21, 2004, between Horizon Bancorp and Wilmington Trust Company related to the issuance of Trust Preferred Securities
|
|
Incorporated by reference to Exhibit 4.1 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No.
000-10792
Film No. 10677545)
|
|
|
|
4.2
|
|
Amended and Restated Declaration of Trust of Horizon Bancorp Capital Trust II, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities
|
|
Incorporated by reference to Exhibit 4.2 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No.
000-10792
Film No. 10677545)
|
|
|
|
4.3
|
|
Junior Subordinated Indenture, dated as of December 15, 2006, between Horizon Bancorp and Wilmington Trust Company.
|
|
Incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K filed December 21, 2006 (SEC File
No. 000-10792
Film No. 061291739)
|
|
|
|
4.4
|
|
Amended and Restated Trust Agreement of Horizon Bancorp Capital Trust III, dated as of December 15, 2006
|
|
Incorporated by reference to Exhibit 4.2 to Registrant’s Form 8-K filed December 21, 2006 (SEC File No.
000-10792
Film No. 061291739)
|
|
|
|
4.5
|
|
Certificate of Designation of Senior Non-Cumulative Perpetual Preferred Stock, Series B
|
|
Incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K filed on August 26, 2011
|
|
|
|
4.6
|
|
Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series B, issued August 25, 2011
|
|
Incorporated by reference to Exhibit 4.2 to Registrant’s Form 8-K filed on August 26, 2011
|
|
|
|
10.1*
|
|
Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1997
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-K for the year ended December 31, 2007 (SEC File No. 000-10792 Film No. 08689720)
|
|
|
|
10.2*
|
|
Horizon Bancorp Amended 2003 Omnibus Equity Incentive Plan
|
|
Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders (SEC File No. 000-10792 Film No. 10693679)
|
|
|
|
10.3*
|
|
Directors Deferred Compensation Plan
|
|
Incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No. 000-10792 Film No. 10677545)
|
|
|
|
10.4*
|
|
Form of Change of Control Agreement for certain executive officers
|
|
Incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No. 000-10792 Film No. 10677545)
|
123
Table of Contents
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated by Reference/Attached
|
|
|
|
10.5*
|
|
Form of Restricted Stock Award Agreement under 2003 Omnibus Equity Incentive Plan
|
|
Incorporated by reference to Exhibit 10.7 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No. 000-10792 Film No. 10677545)
|
|
|
|
10.6*
|
|
Form of Option Grant Agreement under 2003 Omnibus Equity Incentive Plan
|
|
Incorporated by reference to Exhibit 10.8 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No. 000-10792 Film No. 10677545)
|
|
|
|
10.7
|
|
Guarantee Agreement of Horizon Bancorp, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities
|
|
Incorporated by reference to Exhibit 10.10 to Registrant’s Form 10-K for the year ended December 31, 2009 (SEC File No. 000-10792 Film No. 10677545)
|
|
|
|
10.8*
|
|
Description of Executive Officer Bonus Plan
|
|
Attached
|
|
|
|
10.9*
|
|
Horizon Bancorp 2005 Supplemental Executive Retirement Plan as amended
|
|
Incorporated by reference to Exhibit 10.14 to Registrant’s Form 10-K for the year ended December 31, 2006 (SEC File No. 000-10792 Film No. 07714381)
|
|
|
|
10.10*
|
|
Employment Agreement, dated December 1, 2006, among Horizon Bancorp, Horizon Bank, N.A. and Craig M. Dwight
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed December 6, 2006 (SEC File No. 000-10792 Film No. 061259453)
|
|
|
|
10.11*
|
|
Letter Agreement, dated December 1, 2006, between Horizon Bank, N.A. and Craig M. Dwight
|
|
Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed December 6, 2006 (SEC File No. 000-10792 Film No. 061259453)
|
|
|
|
10.12*
|
|
Guarantee Agreement of Horizon Bancorp, dated as of December 15, 2006
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed December 21, 2006 (SEC File No. 000-10792 Film No. 061291739)
|
|
|
|
10.13*
|
|
Employment Agreement, dated July 16, 2007, among Horizon Bancorp, Horizon Bank, N.A. and Thomas H. Edwards
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed July 19, 2007 (SEC File No. 000-10792 Film No. 07988114)
|
|
|
|
10.14*
|
|
Agreement, dated August 28, 2007, between Horizon Bank, N.A., and Mark E. Secor
|
|
Incorporated by reference to Exhibit 10.18 to Registrant’s Form 10-K for the year ended December 31, 2008 (SEC File No. 000-10792 Film No. 09694757)
|
|
|
|
10.15*
|
|
First Amendment of the Agreement between Horizon Bank, N.A., and Mark E. Secor, dated January 1, 2009
|
|
Incorporated by reference to Exhibit 10.19 to Registrant’s Form 10-K for the year ended December 31, 2008 (SEC File No. 000-10792 Film No. 09694757)
|
|
|
|
10.16*
|
|
Employment Agreement, dated December 14, 2011, by and among Horizon Bank, N.A., Horizon Bancorp and James D. Neff
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on December 14, 2011
|
|
|
|
10.17*
|
|
First Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan
|
|
Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2012
|
124
Table of Contents
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated by Reference/Attached
|
|
|
|
10.18*
|
|
Second Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan
|
|
Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2012
|
|
|
|
10.19*
|
|
Fifth Amendment to the Horizon Bancorp 1997 Supplemental Executive Retirement Plan
|
|
Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 2012
|
|
|
|
10.20*
|
|
Horizon Bancorp 2013 Omnibus Equity Incentive Plan
|
|
Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Shareholders
|
|
|
|
10.21*
|
|
Form of Nonqualified Stock Option Agreement
|
|
Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on June 18, 2013
|
|
|
|
10.22*
|
|
Form of Nonqualified Stock Option Agreement (Restrictive Covenant)
|
|
Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed on June 18, 2013
|
|
|
|
10.23*
|
|
Form of Performance Share Award Agreement
|
|
Incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K filed on June 18, 2013
|
|
|
|
10.24*
|
|
Form of Performance Share Award Agreement (Restrictive Covenant)
|
|
Incorporated by reference to Exhibit 10.4 to Registrant’s Form 8-K filed on June 18, 2013.
|
|
|
|
12
|
|
Ratios of Earnings to Fixed Charges and Preferred Stock Dividends
|
|
Attached
|
|
|
|
21
|
|
Subsidiaries of Horizon
|
|
Attached
|
|
|
|
23
|
|
Consent of BKD, LLP
|
|
Attached
|
|
|
|
31.1
|
|
Certification of Craig M. Dwight pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
31.2
|
|
Certification of Mark E. Secor pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
32.1
|
|
Certification of Craig M. Dwight Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
32.2
|
|
Certification of Mark E. Secor 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 File
|
|
Attached
|
*
|
Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K.
|
125
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515 Franklin Square | Michigan City, IN 46360
888-873-2640 |
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