HORIZON BANCORP INC /IN/
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Commission file number 0-10792
Horizon Bancorp
(Exact name of registrant as specified in its charter)
| Indiana | 35-1562417 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 515 Franklin Square, Michigan City | 46360 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 219-879-0211
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, no par value | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Exchange Act Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the average bid price of such stock as of June 30, 2010, the last day of
the registrant’s most recently completed second fiscal quarter, was approximately $49,926,000.
As of March 11, 2011, the registrant had 3,304,237 shares of Common Stock outstanding.
| Part of Form 10-K into which | ||
| Documents Incorporated by Reference Document | portion of document is incorporated | |
| Portions of the Registrant’s Proxy Statement to be filed for its May 5, 2011 annual meeting of shareholders | III |
Table of Contents
Horizon Bancorp
2010 Annual Report on Form 10-K
Table of Contents
2010 Annual Report on Form 10-K
Table of Contents
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Table of Contents
Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
The disclosures in this Item 1 are qualified by the disclosures below in Item 1A, Risk Factors, and
Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, and
in other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
General
Horizon Bancorp (“Horizon” or the “Company”) is a registered bank holding company incorporated in
Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking
services in Northwestern Indiana and Southwestern Michigan through its bank subsidiary, Horizon
Bank, N.A. (the “Bank”) and other affiliated entities. Horizon’s Common Stock is traded on the
Nasdaq Global Market under the symbol HBNC. The Bank was chartered as a national banking
association in 1873 and has operated continuously since that time. The Bank is a full-service
commercial bank offering commercial and retail banking services, corporate and individual trust and
agency services and other services incident to banking.
On June 1, 2010 the Company announced the completion of the purchase of assets and the assumption
of liabilities of American Trust & Savings Bank (“American”) in Whiting, Indiana. The transaction
was consummated on May 28, 2010. The Company purchased most of the banking-related assets of
American totaling $107.8 million and assumed all the deposits, federal home loan bank advances,
trust preferred securities, and accrued interest payable in the approximate amount of $110.3
million. The Company paid a deposit premium on core deposits of approximately $2.1 million and
$500,000 in additional consideration. The Company engaged in this transaction in the expectation
that it would realize increased profits through increasing its investment securities, loans, and
deposits within a new market area. In total, the Bank maintains 21 full service offices and one
loan production office in Northwest Indiana and Southwest Michigan. At December 31, 2010, the Bank
had total assets of $1.4 billion and total deposits of $985.5 million. The Bank has three
wholly-owned subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Insurance
Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Investments manages the
investment portfolio of the Bank. Horizon Insurance offered a full line of personal and corporate
insurance products until March 2005, at which time the majority of its assets were sold to a third
party. Horizon Grantor Trust holds title to certain company owned life insurance policies.
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 acquisition
of Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I
(“Alliance Trust”). The Company also assumed additional debentures as the result of the American
transaction, which formed Am Tru Statutory Trust I (Am Tru Trust). See Note 12 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.
No material part of Horizon’s business is dependent upon a single or small group of customers, the
loss of any one or more of whom would have a materially adverse effect on the business of Horizon.
In 2010, revenues from loans accounted for 62% of the total consolidated revenue, and revenues from
investment securities accounted for 16% of total consolidated revenue.
Employees
The Bank, Horizon Trust and Horizon Investments employed approximately 312 full and part-time
employees as of December 31, 2010. Horizon Insurance and Horizon Grantor Trust do not have any employees.
Competition
A high degree of competition exists in all major areas where Horizon engages in business. The
Bank’s primary market consists of Porter, LaPorte, St. Joseph, Elkhart, and Lake Counties Indiana,
and Berrien and Kalamazoo Counties Michigan. The Bank competes with other commercial banks as well
as with savings and loan associations, consumer
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
finance companies and credit unions. To a more moderate extent, the Bank competes with
Chicago money center banks,
mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in
money market financial services and certain government agencies.
Based on deposits as of June 30, 2010, Horizon was the largest of the 10 bank and thrift
institutions in LaPorte County with a 32.92% market share and the sixth largest of the 14
institutions in Porter County with a 10.53% market share. In Berrien County, Michigan, Horizon was
the fourth largest of the 10 bank and thrift institutions with a 7.28% market share. Horizon’s
market share of deposits in Lake County, Indiana was just over 1% at 1.48%, and less than 1% in
each of the counties of St. Joseph and Elkhart Counties in Indiana and Kalamazoo County in
Michigan. (Source: FDIC Summary of Deposits Market Share Reports, available at www.fdic.gov).
The Bank Holding Company Act
Horizon is registered as a bank holding company and is subject to the supervision of, and
regulation by, the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the
Bank Holding Company Act of 1956, as amended (“BHC Act”). Federal Reserve Board policy has
historically required bank holding companies to act as a source of financial and management
strength for their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”), which was signed into law on July 21, 2010, codified this policy. Under
this requirement, Horizon is required to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances in which Horizon might not otherwise do so.
For this purpose, “source of financial strength” means Horizon’s ability to provide financial
assistance to the Bank in the event of the Bank’s financial distress.
The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting
interest of any bank or bank holding company. Additionally, the BHC Act restricts Horizon’s
non-banking activities to those which are determined by the Federal Reserve to be so closely
related to banking and a proper incident thereto.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), a bank
holding company is required to guarantee the compliance of any insured depository institution
subsidiary that may become “undercapitalized” (as defined in FDICIA) with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.
Bank holding companies are required to comply with the Federal Reserve’s risk-based capital
guidelines. The Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the
Comptroller of the Currency (the “OCC”) also have risk-based capital ratio guidelines to which
depository institutions under their respective supervision are subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk weighted categories,
with higher levels of capital being required for the categories perceived as representing greater
risk. For Horizon’s regulatory capital ratios and regulatory requirements as of December 31, 2010,
see the information in Management’s Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 below, which is incorporated herein by reference.
National Bank Act
The Bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and
examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve,
and the FDIC.
Deposit Insurance
The Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance Corporation
(“FDIC”), which is generally $250,000 per depositor, subject to aggregation rules. In response to
FDIC’s increased costs resulting from the higher levels of bank failures that began in 2008, the
Bank’s FDIC expense has increased significantly. In addition to higher assessment rates, the Bank
was required to pay a special FDIC assessment as of June 30, 2009, and also paid an assessment to
participate in the FDIC Transaction Account Guarantee Program, as discussed below.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), resulted in significant
changes to the federal deposit insurance program. Effective March 31, 2006, the Bank Insurance
Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) were merged to create a new fund,
called the Deposit Insurance Fund (“DIF”).
The Bank is subject to deposit insurance assessment by the FDIC, which is a risk-related deposit
insurance assessment system where premiums are based upon the institution’s capital levels and risk
profile. Under this system, insured institutions are assigned to one of four risk-weighted
categories based on supervisory evaluations, regulatory capital levels, and certain other factors
with less risky institutions paying lower assessments.
An institution’s initial assessment rate depends upon the category to which it is assigned.
Adjustments also are made to a bank’s initial assessment rates based on levels of long-term
unsecured debt, secured liabilities in excess of 252% of domestic deposits and, for certain
institutions, brokered deposit levels. For 2010, initial assessments ranged from 12 to 45 basis
points of assessable deposits, and the Bank paid assessments at the rate of 15 basis points for
each $100 of insured deposits.
In November 2009, the FDIC issued a final rule that required banks to pay the fourth quarter FDIC
assessment and to prepay estimated insurance assessments for the years 2010 through 2012. On
December 30, 2009, the Bank paid an aggregate of $5.3 million in premiums, $5.0 million of which
constituted prepaid premiums.
Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance
Fund at no less than 1.35%, and must achieve the 1.35% designated reserve ratio by September 30,
2020. The FDIC must offset the effect of the increase in the minimum designated reserve ratio from
1.15% to 1.35% on insured depository institutions of less than $10 billion, and may declare
dividends to depository institutions when the reserve ratio at the end of a calendar quarter is at
least 1.5%, although the FDIC has the authority to suspend or limit such permitted dividend
declarations. In December, 2010, the FDIC adopted a final rule setting the designated reserve ratio
for the deposit insurance fund at 2% of estimated insured deposits.
On October 19, 2010, the FDIC proposed a comprehensive long-range plan for deposit insurance fund
management with the goals of maintaining a positive fund balance, even during periods of large fund
losses, and maintaining steady, predictable assessment rates throughout economic and credit cycles.
The FDIC determined not to increase assessments in 2011 by 3 basis points, as previously proposed,
but to keep the current rate schedule in effect. In addition, the FDIC proposed adopting a lower
assessment rate schedule when the designated reserve ratio reaches 1.15% so that the average rate
over time should be about 8.5 basis points. In lieu of dividends, the FDIC proposed adopting lower
rate schedules when the reserve ratio reaches 2% and 2.5%, so that the average rates will decline
about 25 percent and 50 percent, respectively.
Under the Dodd-Frank Act, the assessment base for deposit insurance premiums is to be changed from
adjusted domestic deposits to average consolidated total assets minus average tangible equity.
Tangible equity for this purpose means Tier 1 capital. Since this is a larger base than adjusted
domestic deposits, assessment rates are expected to be lowered. In February 2011, the FDIC approved
a new rule effective April 1, 2011 (to be reflected in invoices for assessments due September 30,
2011), which will implement these changes. The proposed rule includes new rate schedules scaled to
the increase in the assessment base, including schedules that will go into effect when the reserve
ratio reaches 1.15%, 2% and 2.5%. The FDIC staff projected that the new rate schedules would be
approximately revenue neutral.
Effective April 1, 2011, the initial base assessment rates are as follows:
| • | For small Risk Category I banks, such as Horizon, the rates would range from 5-9 basis points. | ||
| • | The rates for small institutions in Risk Categories II, III and IV would be 14, 23 and 35 basis points, respectively. | ||
| • | For large institutions and large, highly complex institutions, the rate schedule ranges from 5 to 35 basis points. |
There are also adjustments made to the initial assessment rates based on long-term unsecured debt,
depository institution debt, and brokered deposits.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
The FDIC also revised the assessment system for large depository institutions with over $10
billion in assets.
In 2008, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee,
noninterest bearing transaction accounts would receive unlimited insurance coverage until June 30,
2010 (later extended to December 31, 2010) and, for a fee, certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and October 31, 2009 would be
guaranteed by the FDIC through December 31, 2012. The Bank made
the business decision to participate in the unlimited noninterest bearing transaction account coverage, but
Horizon and the Bank elected not to participate in the unsecured debt guarantee program. The
assessments for unlimited noninterest bearing transaction account coverage for deposit amounts over
$250,000 were 15 basis points per $100 of insured deposits during 2010.
The Dodd-Frank Act extended unlimited insurance on noninterest bearing accounts for no additional
charges through December 31, 2012. Under this program, traditional noninterest demand deposit (or
checking) accounts that allow for an unlimited number of transfers and withdrawals at any time,
whether held for a business, individual, or other type of depositor, are covered. Later, Congress
added Lawyers’ Trust Accounts (IOLTA) to this unlimited insurance protection through December 31,
2012.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC
determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe and unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process
for a permanent termination of insurance if the institution has no tangible capital.
FDIC-insured institutions also remain subject to the requirement to pay assessments to the FDIC to
fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the
Federal government established to recapitalize the predecessor to the SAIF. The amount assessed on
individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit
insurance according to the risk-related assessment rate schedule. These assessments will continue
until the FICO bonds are repaid between 2017 and 2019. During 2010, the FICO assessment rate
ranged between 1.06 and 1.04 basis points for each $100 of insured deposits per quarter. For the
first quarter of 2011, the FICO assessment rate is 1.02 basis points for each $100 in domestic
deposits maintained at an institution.
General Regulatory Supervision
Both federal and state law extensively regulate various aspects of the banking business, such as
reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity,
fair credit reporting, trading in securities and other aspects of banking operations. Branching by
the Bank is subject to the jurisdiction and requires notice to, or the prior approval of, the OCC.
The Dodd-Frank Act permits the establishment of de novo branches in states where such branches
could be opened by a state bank chartered by that state. The consent of the state is no longer
required.
Transactions with Affiliates and Insiders
Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions
between banks, affiliated companies and their executive officers, including limits on credit
transactions between these parties. The statute prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and restricts the types
of collateral security permitted in connection with a bank’s extension of credit to an affiliate.
Effective July 21, 2011, among other changes, the Dodd-Frank Act will eliminate the exceptions
under Section 23A of the Federal Reserve Act for transactions with financial subsidiaries and will
expand the scope of transactions treated as “covered transactions” to include derivatives
transactions and securities repurchase agreements. The Dodd-Frank Act also expands the types of
transactions subject to insider lending limits.
Capital Regulation
The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and
bank holding companies that are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and account for off-balance
sheet items. Risk-based capital ratios are determined by allocating
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Table of Contents
Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
assets and specified off-balance sheet commitments to four risk weighted categories of 0%,
20%, 50%, or 100%, with higher levels of capital being required for the categories perceived as
representing greater risk.
The capital guidelines divide a bank holding company’s or bank’s capital into two tiers. The first
tier (“Tier I”) includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary capital (“Tier II”) includes, among other items,
cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities,
certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations,
less required deductions. Banks and bank holding companies are required to maintain a total
risk-based capital ratio of at least 8%, of which 4% must be Tier I capital. The federal banking
regulators may, however, set higher capital requirements when a bank’s particular circumstances
warrant. Banks experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
Also required by the regulations is the maintenance of a leverage ratio designed to supplement the
risk-based capital guidelines. This ratio is computed by dividing Tier I capital, net of all
intangibles, by the quarterly average of total assets. The minimum leverage ratio is 3% for the
most highly rated institutions, and 1% to 2% higher for institutions not meeting those standards.
Pursuant to the regulations, banks must maintain capital levels commensurate with the level of
risk, including the volume and severity of problem loans to which they are exposed.
In December 2008, the Company received $25,000,000 in exchange for 25,000 shares of its Fixed Rate
Cumulative Preferred Stock, Series A, issued to the Treasury Department, and related warrants. Of
that amount, $20,000,000 was contributed to the Bank. As a result, the Company’s and the Bank’s
regulatory capital have increased significantly from the capital reported in prior periods. On
November 3, 2010, the Company received approval to redeem 25%, or $6.25 million, of the Treasury’s
original $25.0 million preferred stock investment in the Company from the Capital Purchase Program,
which is a program of the Troubled Assets Relief Program (“TARP”). On November 10, 2010, the
Company completed the redemption process reducing the Treasury’s preferred stock investment in the
Company to $18.75 million.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
The following is a summary of Horizon’s and the Bank’s regulatory capital and capital
requirements at December 31, 2010.
| For Capital 1 | For Well 1 | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Capitalized Purposes | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||
|
Total capital
1
(to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 144,941 | 15.07 | % | $ | 76,943 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Bank
|
133,893 | 13.96 | % | 76,730 | 8.00 | % | $ | 95,912 | 10.00 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital
1
(to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
132,860 | 13.81 | % | 38,482 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
121,812 | 12.70 | % | 38,366 | 4.00 | % | 57,549 | 6.00 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital
1
(to average assets)
|
||||||||||||||||||||||||
|
Consolidated
|
132,860 | 9.37 | % | 56,717 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
121,812 | 8.60 | % | 56,657 | 4.00 | % | 70,821 | 5.00 | % | |||||||||||||||
| 1 | As defined by regulatory agencies |
The Dodd-Frank Act also requires the Federal Reserve to set minimum capital levels for bank
holding companies that are as stringent as those required for insured depository subsidiaries
except that bank holding companies with less than $500 million in assets are exempt from these
capital requirements.
Prompt Corrective Regulatory Action.
Federal law provides the federal banking regulators with broad powers to take prompt corrective
action to resolve the problems of undercapitalized institutions. The extent of the regulators’
powers depends on whether the institution in question is “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized,” as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators’ corrective powers include: (i) requiring the submission of
a capital restoration plan; (ii) placing limits on asset growth and restrictions on activities;
(iii) requiring the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions with affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the
institution; (vii) requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the
institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the institution. At December 31,
2010, the Bank was categorized as “well capitalized,” meaning that the Bank’s total risk-based
capital ratio exceeded 10%, the Bank’s Tier I risk-based capital ratio exceeded 6%, the Bank’s
leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
Anti-Money Laundering and the USA Patriot Act
Horizon is subject to the provisions of the USA PATRIOT Act of 2001, which contains anti-money
laundering and financial transparency laws and requires financial institutions to implement
additional policies and procedures with respect to, or additional measures designed to address, any
or all of the following matters, among others: money laundering, suspicious activities and currency
transaction reporting, and currency crimes.
Sarbanes-Oxley Act of 2002
Horizon also is subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which revised
the laws affecting corporate governance, accounting obligations and corporate reporting. The
Sarbanes-Oxley Act applies to all companies with equity or debt securities registered under the
Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new
requirements for audit committees, including independence, expertise and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief Executive Officer and
Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation
of audits; (iv) increased disclosure and reporting obligations for the reporting company and their
directors and executive officers; and (v) new and increased civil and criminal penalties for
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
violation of the securities laws. Management expects that significant additional efforts and
expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.
The Securities and Exchange Commission has adopted final rules implementing Section 404 of the
Sarbanes-Oxley Act of 2002. In each Form 10-K it files, Horizon is required to include a report of
management on Horizon’s internal control over financial reporting. The internal control report
must include a statement of management’s responsibility for establishing and maintaining adequate
control over financial reporting of Horizon, identify the framework used by management to evaluate
the effectiveness of Horizon’s internal control over financial reporting and provide management’s
assessment of the effectiveness of Horizon’s internal control over financial reporting.
Significant efforts were required to comply with Section 404 and Horizon anticipates additional
efforts will be required in future years.
Recent Legislative Developments
Emergency
Economic Stabilization Act of 2008 and Troubled Asset Relief
Program’s Capital Purchase Program
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the
EESA, the U.S. Department of Treasury (the “Treasury”) has the authority to, among other things,
purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. On October 14, 2008, the Treasury also announced it would offer to
qualifying U.S. banking organizations the opportunity to sell preferred stock, along with warrants
to purchase common stock, to the Treasury on what may be considered attractive terms under the
Troubled Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”). The CPP allows
financial institutions, like Horizon, to issue non-voting preferred stock to the Treasury in an
amount ranging between 1% and 3% of the institution’s total risk-weighted assets.
Although both Horizon and the Bank met all applicable regulatory capital requirements and were well
capitalized, Horizon determined that obtaining additional capital pursuant to the CPP for
contribution in whole or in part to the Bank was advisable given the then current economic
recession and the benefits the additional capital provides in managing through an economic
recession. As a result, Horizon decided to participate in the CPP Program and sold $25,000,000 of
its Fixed Rate Cumulative Preferred Stock, Series A to the Treasury on December 19, 2007.
The general terms of the preferred stock issued by Horizon under the CPP are as follows:
| • | Dividends at the rate of 5% per annum, payable quarterly in arrears, are required to be paid on the preferred stock for the first five years and dividends at the rate of 9% per annum are required thereafter until the stock is redeemed by Horizon; | ||
| • | Without the prior consent of the Treasury, Horizon will be prohibited from increasing its common stock dividends or repurchasing its common stock for the first three years while Treasury is an investor; | ||
| • | During the first three years the preferred stock is outstanding, Horizon will be prohibited from repurchasing such preferred stock, except with the proceeds from a sale of Tier 1 qualifying common or other preferred stock of Horizon in an offering that raises at least 25% of the initial offering price of the preferred stock sold to the Treasury ($6,250,000). After the first three years, the preferred stock can be redeemed at any time with any available cash; | ||
| • | Under the CPP, Horizon also issued to the Treasury warrants entitling the Treasury to buy 212,104 shares of Horizon’s common stock at an exercise price of $17.68 per share; and | ||
| • | Horizon agreed to certain compensation restrictions for its senior executive officers and restrictions on the amount of executive compensation which is tax deductible. |
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of
2009 (the “ARRA”). The ARRA amended, among other things, the TARP Program legislation by directing
the Treasury Department to issue regulations implementing strict limitations on compensation paid
or accrued by financial institutions, like Horizon, participating in the TARP Program. These
limitations include:
9
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
| • | A prohibition on paying or accruing bonus, incentive or retention compensation for our President and Chief Executive Officer, other than certain awards of long-term restricted stock or bonuses payable under existing employment agreements; | ||
| • | A prohibition on making any payments to the executive officers of Horizon and the next five most highly compensated employees for departure from Horizon other than compensation earned for services rendered or accrued benefits; | ||
| • | Subjecting bonus, incentive and retention payments made to the executive officers of Horizon and the next 20 most highly compensated employees to repayment (clawback) if based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate; | ||
| • | A prohibition on any compensation plan that would encourage manipulation of reported earnings; | ||
| • | Establishment by the Board of Directors of a company-wide policy regarding excessive or luxury expenditures including office and facility renovations, aviation or other transportation services and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or similar measures in the ordinary course of business; | ||
| • | Submitting a “say-on-pay” proposal to a non-biding vote of shareholders at future annual meetings, whereby shareholders vote to approve the compensation of executives as disclosed pursuant to the executive compensation disclosures included in the proxy statement; and | ||
| • | A review by the U.S. Department of Treasury of any bonus, retention awards or other compensation paid to the executive officers of Horizon and the next 20 most highly compensated employees prior to February 17, 2009 to determine if such payments were excessive and negotiate for the reimbursement of such excess payments. |
On June 10, 2009, Treasury issued an interim final rule implementing and providing guidance on the
executive compensation and corporate governance provisions of EESA, as amended by ARRA. The
regulations were published in the Federal Register on June 15, 2009, and set forth the following
requirements:
| • | Evaluation of employee compensation plans and potential to encourage excessive risk or manipulation of earnings. | ||
| • | Compensation committee discussion, evaluation and review of senior executive officer compensation plans and other employee compensation plans to ensure that they do not encourage unnecessary and excessive risk. | ||
| • | Compensation committee discussion, evaluation and review of employee compensation plans to ensure that they do not encourage manipulation of reported earnings. | ||
| • | Compensation committee certification and disclosure requirements regarding evaluation of employee compensation plans. | ||
| • | “Clawback” of bonuses. | ||
| • | Prohibition on golden parachute payments based on materially inaccurate financial statements or performance metrics. | ||
| • | Limitation on bonus payments, retention awards and incentive compensation. | ||
| • | Disclosure regarding perquisites and compensation consultants; prohibition on gross-ups. | ||
| • | Luxury or excessive expenditures policy. | ||
| • | Shareholder advisory resolution on executive compensation. | ||
| • | Annual compliance certification by principal executive officer and principal financial officer. | ||
| • | Establishment of the Office of the Special Master for TARP Executive Compensation with authority to review certain payments and compensation structures. |
On October 22, 2009, the Federal Reserve issued proposed supervisory guidance designed to ensure
that incentive compensation practices of banking organizations are consistent with safety and
soundness. Uncertainty exists regarding the interpretation and application of this guidance, and
the impact of the guidance on recruitment, retention and motivation of key officers and employees.
ARRA was followed by numerous actions by the Federal Reserve, Congress, Treasury, the SEC and
others to address the current liquidity and credit crisis that has followed the sub-prime meltdown
that commenced in 2007. These measures include homeowner relief that encourage loan restructuring
and modification; the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate; emergency action
10
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
against short selling practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; coordinated international efforts to address illiquidity and other weaknesses in the
banking sector; and legislation that would require creditors that transfer loans and
securitizations of loans to maintain a material portion (generally at least 10%) of the credit risk
of the loans transferred or securitized.
On November 10, 2010, Horizon repurchased 6,250 of the 25,000 outstanding Series A Preferred Shares
held by the Treasury. Horizon paid $6.25 million to repurchase the preferred shares along with the
accrued dividend for the shares repurchased. Horizon has also applied for a $19 million loan under
the recently implemented Small Business Loan Fund program (the “SBLF”), and if its application is
approved, Horizon plans to repurchase the remaining $18.5 million in Series A Preferred Shares from
the Treasury with those proceeds. Enacted into law as part of the Small Business Jobs Act of 2010,
the SBLF is a $30 billion fund that encourages lending to small businesses by providing Tier 1
capital to qualified community banks with assets of less than $10 billion. The SBLF program
provides an option for community banks to refinance preferred stock issued to the Treasury through
the Capital Purchase Program, and the SBLF program does not impose many of the restrictions that
Horizon is currently subject to under TARP. There can be no assurance, however, that Horizon will
receive the SBLF funds, and if Horizon does not receive the funds, Horizon’s plan is to repurchase
the remaining preferred shares over the next three years from earnings.
Other Regulation
In addition to the matters discussed above, the Bank is subject to additional regulation of its
activities, including a variety of consumer protection regulations affecting its lending, deposit,
and collection activities and regulations affecting secondary mortgage market activities.
Effect of Governmental Monetary Policies
The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies. The Federal Reserve’s monetary policies
have had, and are likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have
major effects upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of the discount rate
on borrowings of member banks and the reserve requirements against member bank deposits. It is not
possible to predict the nature or impact of future changes in monetary and fiscal policies.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB
serves as a reserve or central bank for its members within its assigned region. The FHLB is funded
primarily from funds deposited by banks and savings associations and proceeds derived from the sale
of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB
advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal
Housing Finance Board (“FHFB”), an independent agency, controls the FHLB System, including the FHLB
of Indianapolis.
As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of
Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts, or similar obligations at the beginning of each year. At December 31,
2010, the Bank’s investment in stock of the FHLB of Indianapolis was $11.4 million. The FHLB
imposes various limitations on advances such as limiting the amount of certain types of real estate
related collateral to 30% of a member’s capital and limiting total advances to a member. Interest
rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of
Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings associations and to
contribute to affordable housing programs through direct loans or interest subsidies on advances
targeted for community investment and low and moderate income housing projects. For the year ended
December 31, 2010, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately
$214,000, for an annualized rate of 1.9%.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Limitations on Rates Paid for Deposits
FDIC regulations place limitations on the interest rates that less than well-capitalized insured
depository institutions may pay on deposits. Under these regulations, “well capitalized” depository
institutions may accept, renew or roll such deposits over without restriction, “adequately
capitalized” depository institutions may accept, renew or roll such deposits over with a waiver
from the FDIC (subject to certain restrictions on payments of rates) and “undercapitalized”
depository institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of “well capitalized,” “adequately capitalized” and
“undercapitalized” will be the same as the definition adopted by the agencies to implement the
corrective action provisions of federal law. Management does not believe that these regulations
will have a materially adverse effect on the Bank’s current operations.
Legislative Initiatives
Additional legislative and administrative actions affecting the banking industry may be considered
by the United States Congress, state legislatures and various regulatory agencies, including those
referred to above. It cannot be predicted with certainty whether such legislative or
administrative action will be enacted or the extent to which the banking industry in general or
Horizon and its affiliates will be affected.
Recent Legislative Developments
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly changes
the regulation of financial institutions and the financial services industry. The Dodd-Frank Act
includes provisions affecting large and small financial institutions alike, including several
provisions that will profoundly affect how community banks, thrifts, and small bank and thrift
holding companies will be regulated in the future. Among other things, these provisions abolish
the Office of Thrift Supervision and transfer its functions to the other federal banking agencies,
relax rules regarding interstate branching, allow financial institutions to pay interest on
business checking accounts, change the scope of federal deposit insurance coverage, and impose new
capital requirements on bank and thrift holding companies.
The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent
entity within the Federal Reserve, which will be given the authority to promulgate consumer
protection regulations applicable to all entities offering consumer financial services or products,
including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering
mortgage loan origination standards affecting, among other things, originator compensation, minimum
repayment standards, and pre-payments. The Dodd-Frank Act contains numerous other provisions
affecting financial institutions of all types, many of which may have an impact on the operating
environment of Horizon in substantial and unpredictable ways. The nature and extent of future
legislative and regulatory changes affecting financial institutions, including as a result of the
Dodd-Frank Act, is very unpredictable at this time.
Horizon’s management is actively reviewing the provisions of the Dodd-Frank Act and assessing its
probable impact on the business, financial condition and results of operations of Horizon. The
ultimate effect of the Dodd-Frank Act on the financial services industry in general, and Horizon in
particular, is uncertain at this time. Many aspects of the Dodd-Frank Act are subject to rulemaking
and will take effect over several years, making it difficult to anticipate the overall financial
impact on Horizon and the financial services industry more generally. Provisions in the legislation
that affect deposit insurance assessments and payment of interest on demand deposits could increase
the costs associated with deposits.
Consumer Financial Protection Bureau.
The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial
Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers
under various federal consumer financial protection laws, including the Equal Credit Opportunity
Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair
Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and
certain other statutes. The CFPB will have examination and primary enforcement authority with
respect to depository institutions with $10 billion or more in assets. Smaller institutions will be
subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal
banking regulators for consumer compliance purposes. The CFPB will have authority to prevent
unfair, deceptive or abusive practices in connection with
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to
establish certain minimum standards for the origination of residential mortgages including a
determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow
borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified
mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection
laws and standards that are more stringent than those adopted at the federal level and, in certain
circumstances, permits state attorneys general to enforce compliance with both the state and
federal laws and regulations. Federal preemption of state consumer protection law requirements,
traditionally an attribute of the federal savings association charter, has also been modified by
the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and
eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised
federal preemption standard, the operations of the Bank could become subject to additional
compliance burdens in the states in which it operates.
Mortgage Reform and Anti-Predatory Lending
Title XIV of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act, includes a
series of amendments to the Truth In Lending Act with respect to mortgage loan origination
standards affecting, among other things, originator compensation, minimum repayment standards and
pre-payments. With respect to mortgage loan originator compensation, except in limited
circumstances, an originator is prohibited from receiving compensation that varies based on the
terms of the loan (other than the principal amount). The amendments to the Truth In Lending Act
also prohibit a creditor from making a residential mortgage loan unless it determines, based on
verified and documented information of the consumer’s financial resources, that the consumer has a
reasonable ability to repay the loan. The amendments also prohibit certain pre-payment penalties
and require creditors offering a consumer a mortgage loan with a pre-payment penalty to offer the
consumer the option of a mortgage loan without such a penalty. In addition, the Dodd-Frank Act
expands the definition of a “high-cost mortgage” under the Truth In Lending Act, and imposes new
requirements on high-cost mortgages and new disclosure, reporting and notice requirements for
residential mortgage loans, as well as new requirements with respect to escrows and appraisal
practices.
Interchange Fees for Debit Cards
Under the Dodd-Frank Act, interchange fees for debit card transactions must be reasonable and
proportional to the issuer’s incremental cost incurred with respect to the transaction plus certain
fraud related costs. Although institutions with total assets of less than $10 billion are exempt
from this requirement, competitive pressures are likely to require smaller depository institutions,
like Horizon, to reduce fees with respect to these debit card transactions.
13
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
BANK HOLDING COMPANY STATISTICAL DISCLOSURES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST
DIFFERENTIAL
Information required by this section of Securities Act Industry Guide 3 is presented in
Management’s Discussion and Analysis as set forth in Item 7 below, herein incorporated by
reference.
II. INVESTMENT PORTFOLIO
| A. | The following is a schedule of the amortized cost and fair value of investment securities available for sale and held to maturity. |
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
|
Available for sale
|
||||||||||||||||||||||||
|
U.S. Treasury and federal agencies
|
$ | 24,727 | $ | 25,251 | $ | 19,612 | $ | 20,085 | $ | 23,661 | $ | 24,914 | ||||||||||||
|
State and municipal
|
132,380 | 131,489 | 107,160 | 109,149 | 88,282 | 86,985 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Federal agency collateralized mtg.
obligations
|
100,106 | 101,837 | 76,222 | 77,289 | 8,702 | 8,925 | ||||||||||||||||||
|
Federal agency mortgage-backed pools
|
114,390 | 117,895 | 113,633 | 118,661 | 174,227 | 176,389 | ||||||||||||||||||
|
Private labeled mortgage-backed pools
|
5,197 | 5,323 | 7,779 | 7,606 | 4,361 | 4,026 | ||||||||||||||||||
|
Corporate notes
|
555 | 549 | 355 | 342 | 587 | 399 | ||||||||||||||||||
|
Total available for sale
|
377,355 | 382,344 | 324,761 | 333,132 | 299,820 | 301,638 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total held to maturity, state and municipal
|
9,595 | 9,595 | 11,657 | 11,687 | 1,630 | 1,634 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total investment securities
|
$ | 386,950 | $ | 391,939 | $ | 336,418 | $ | 344,819 | $ | 301,450 | $ | 303,272 | ||||||||||||
| B. | The following is a schedule of maturities of each category of available for sale and held to maturity debt securities and the related weighted-average yield of such securities as of December 31, 2010: |
| After One Year | After Five Years | |||||||||||||||||||||||||||||||
| One Year or Less | Through Five Years | Through Ten Years | After Ten Years | |||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
|
Available for sale
|
||||||||||||||||||||||||||||||||
|
U.S. Treasury and federal agencies
(1)
|
$ | — | 0.00 | % | $ | 10,972 | 2.89 | % | $ | 4,894 | 2.63 | % | $ | 9,385 | 5.65 | % | ||||||||||||||||
|
State and municipal
|
866 | 2.58 | % | 17,977 | 3.55 | % | 39,555 | 3.99 | % | 73,091 | 4.20 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Collateralized mtg. obligations
(2)
|
— | 0.00 | % | — | 0.00 | % | 11,211 | 4.42 | % | 95,949 | 3.76 | % | ||||||||||||||||||||
|
Federal agency mortgage-backed pools
(2)
|
558 | 4.10 | % | 1,900 | 4.11 | % | 21,238 | 3.96 | % | 94,199 | 4.42 | % | ||||||||||||||||||||
|
Corporate notes
|
— | 0.00 | % | — | 0.00 | % | — | 0.00 | % | 549 | 0.00 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total available for sale
|
$ | 1,424 | 3.18 | % | $ | 30,849 | 3.35 | % | $ | 76,898 | 3.96 | % | $ | 273,173 | 4.16 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total held to maturity, state and municipal
|
$ | 9,495 | 2.65 | % | $ | 100 | 3.35 | % | $ | — | 0.00 | % | $ | — | 0.00 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total investment securities
|
$ | 10,919 | 2.72 | % | $ | 30,949 | 3.35 | % | $ | 76,898 | 3.96 | % | $ | 273,173 | 4.16 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| (1) | Fair value is based on contractual maturity or call date where a call option exists | |
| (2) | Maturity based upon final maturity date |
| The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis. |
| Excluding those holdings of the investment portfolio in Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded 10% of the consolidated stockholders’ equity of Horizon at December 31, 2010. |
14
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
III. LOAN PORTFOLIO
| A. | Types of Loans - Total loans on the balance sheet are comprised of the following classifications for the years indicated. |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Commercial
|
$ | 330,018 | $ | 314,517 | $ | 310,842 | $ | 307,535 | $ | 271,457 | ||||||||||
|
Real estate
|
162,435 | 133,892 | 167,766 | 216,019 | 222,235 | |||||||||||||||
|
Mortgage warehouse
|
123,743 | 166,698 | 123,287 | 78,225 | 112,267 | |||||||||||||||
|
Consumer
|
266,681 | 271,210 | 280,072 | 287,073 | 237,875 | |||||||||||||||
|
|
882,877 | 886,317 | 881,967 | 888,852 | 843,834 | |||||||||||||||
|
Allowance for loan losses
|
(19,064 | ) | (16,015 | ) | (11,410 | ) | (9,791 | ) | (8,738 | ) | ||||||||||
|
Total loans
|
$ | 863,813 | $ | 870,302 | $ | 870,557 | $ | 879,061 | $ | 835,096 | ||||||||||
| B. | Maturities and Sensitivities of Loans to Changes in Interest Rates - The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage, mortgage warehousing and installment loans, as of December 31, 2010: |
| One Year | One Through | After Five | ||||||||||||||
| or Less | Five Years | Years | Total | |||||||||||||
|
Maturing or repricing
Commercial, financial,agricultural and commercial tax-exempt loans
|
$ | 259,709 | $ | 60,694 | $ | 9,614 | $ | 330,017 | ||||||||
| The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.) |
| Fixed | Variable | |||||||
| Rate | Rate | |||||||
|
Total commercial, financial, agricultural and
commercial tax-exempt loans due after one year
|
$ | 69,729 | $ | 43,036 | ||||
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
C.
Risk Elements
| Non-accrual, Past Due and Restructured Loans - The following schedule summarizes non-accrual, past due and restructured loans. |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Non-performing loans
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
More than 90 days past due
|
$ | — | $ | 1,086 | $ | 49 | $ | — | $ | — | ||||||||||
|
Non-accrual
|
7,508 | 8,143 | 5,118 | 1,870 | 1,768 | |||||||||||||||
|
Trouble debt restructuring — accruing
|
574 | — | — | — | — | |||||||||||||||
|
Trouble debt restructuring — non-accrual
|
— | — | — | — | — | |||||||||||||||
|
Real estate
|
||||||||||||||||||||
|
More than 90 days past due
|
222 | 296 | 464 | — | 89 | |||||||||||||||
|
Non-accrual
|
5,483 | 1,257 | 1,440 | 512 | 614 | |||||||||||||||
|
Trouble debt restructuring — accruing
|
3,380 | 3,266 | — | — | — | |||||||||||||||
|
Trouble debt restructuring — non-accrual
|
241 | — | — | — | — | |||||||||||||||
|
Mortgage warehouse
|
||||||||||||||||||||
|
More than 90 days past due
|
— | — | — | — | — | |||||||||||||||
|
Non-accrual
|
— | — | — | — | — | |||||||||||||||
|
Trouble debt restructuring — accruing
|
— | — | — | — | — | |||||||||||||||
|
Trouble debt restructuring — non-accrual
|
— | — | — | — | — | |||||||||||||||
|
Consumer
|
||||||||||||||||||||
|
More than 90 days past due
|
136 | 376 | 318 | 87 | 55 | |||||||||||||||
|
Non-accrual
|
3,682 | 2,515 | 474 | 480 | 99 | |||||||||||||||
|
Trouble debt restructuring — accruing
|
165 | 206 | — | — | — | |||||||||||||||
|
Trouble debt restructuring — non-accrual
|
37 | — | — | — | — | |||||||||||||||
|
Total non-performing loans
|
21,428 | 17,145 | 7,863 | 2,949 | 2,625 | |||||||||||||||
|
Other real estate owned and repossessed
collateral
|
||||||||||||||||||||
|
Commercial
|
1,622 | 544 | — | — | — | |||||||||||||||
|
Real estate
|
1,042 | 1,186 | 2,772 | 238 | 75 | |||||||||||||||
|
Mortgage warehouse
|
— | — | — | — | — | |||||||||||||||
|
Consumer
|
— | 23 | 207 | 303 | 120 | |||||||||||||||
|
Total other real estate owned and
repossessed collateral
|
2,664 | 1,753 | 2,979 | 541 | 195 | |||||||||||||||
|
Total non-performing assets
|
$ | 24,092 | $ | 18,898 | $ | 10,842 | $ | 3,490 | $ | 2,820 | ||||||||||
|
Gross interest income that would
have been recorded on non-accrual
loans outstanding as of December 31,
2010, in the period if the loans had
been current, in accordance with
their original terms and had been
outstanding throughout the period or
since origination if held for part
of the period.
|
$ | 1,437 | ||
|
Interest income actually recorded on
non-accrual loans outstanding as of
December 31, 2010, and included in
net income for the period.
|
693 | |||
|
|
||||
|
Interest income not recognized
during the period on non-accrual
loans outstanding as of December 31,
2010.
|
$ | 744 | ||
|
|
||||
Discussion of Non-Accrual Policy
| 1. | From time to time, the Bank obtains information, which may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of such, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. Further, it is management’s policy to place a commercial loan on a non-accrual status when delinquent in excess of 90 days or have had the accrual of interest discontinued by |
16
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
| management. The officer responsible for the loan, the Chief Operating Officer and the senior collection officer must review all loans placed on non-accrual status. |
| 2. | Potential Problem Loans: | ||
| Impaired and non-accrual loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $21.4 million and $17.1 million at December 31, 2010 and 2009. The allowance for impaired and non-accrual loans, included in the Bank’s allowance for loan losses totaled $3.4 million and $3.5 million at those respective dates. The average balance of impaired loans during 2010 and 2009 was $8.1 million and $14.3 million. |
| 3. | Foreign Outstandings: | ||
| None |
| 4. | Loan Concentrations: | ||
| As of December 31, 2010, there are no significant concentrations of loans exceeding 10% of total loans. See Item III A above for a listing of the types of loans by concentration. |
D.
Other Interest-Bearing Assets
| There are no other interest-bearing assets as of December 31, 2010, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans. |
IV. SUMMARY OF LOAN LOSS EXPERIENCE
| A. | The following is an analysis of the activity in the allowance for loan losses account: |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Loans outstanding at the end of the period
(1)
|
$ | 882,877 | $ | 886,317 | $ | 881,967 | $ | 888,852 | $ | 843,834 | ||||||||||
|
Average loans outstanding during the period
(1)
|
878,181 | 892,431 | 848,279 | 853,314 | 780,555 | |||||||||||||||
|
|
||||||||||||||||||||
| (1) Net of unearned income and deferred loan fees | ||||||||||||||||||||
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Balance at beginning of the period
|
$ | 16,015 | $ | 11,410 | $ | 9,791 | $ | 8,738 | $ | 8,368 | ||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Commercial and agricultural
|
3,856 | 2,461 | 1,358 | — | 23 | |||||||||||||||
|
Real estate
|
811 | 432 | 351 | 36 | — | |||||||||||||||
|
Consumer
|
5,068 | 7,354 | 5,277 | 2,701 | 1,120 | |||||||||||||||
|
Total loans charged-off
|
9,735 | 10,247 | 6,986 | 2,737 | 1,143 | |||||||||||||||
|
Recoveries of loans previously
charged-off:
|
||||||||||||||||||||
|
Commercial and agricultural
|
228 | 66 | 15 | 48 | 201 | |||||||||||||||
|
Real estate
|
1 | — | 50 | — | — | |||||||||||||||
|
Consumer
|
1,001 | 1,183 | 972 | 674 | 407 | |||||||||||||||
|
Total loan recoveries
|
1,230 | 1,249 | 1,037 | 722 | 608 | |||||||||||||||
|
Net loans charged-off
|
8,505 | 8,998 | 5,949 | 2,015 | 535 | |||||||||||||||
|
Provision charged to operating
expense
|
11,554 | 13,603 | 7,568 | 3,068 | 905 | |||||||||||||||
|
Balance at the end of the period
|
$ | 19,064 | $ | 16,015 | $ | 11,410 | $ | 9,791 | $ | 8,738 | ||||||||||
|
Ratio of net charge-offs to
average loans outstanding for the
period
|
0.97 | % | 1.01 | % | 0.70 | % | 0.24 | % | 0.07 | % | ||||||||||
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(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
| B. | The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and the percentage of loans in each category to total loans. |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| Allowance | % of Loans to | Allowance | % of Loans to | Allowance | % of Loans to | Allowance | % of Loans to | Allowance | % of Loans to | |||||||||||||||||||||||||||||||
| Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | |||||||||||||||||||||||||||||||
|
Commercial,
financial and
agricultural
|
$ | 7,554 | 36 | % | $ | 5,766 | 35 | % | $ | 3,202 | 35 | % | $ | 2,656 | 35 | % | $ | 2,987 | 33 | % | ||||||||||||||||||||
|
Real estate
|
2,379 | 18 | % | 1,933 | 15 | % | 973 | 19 | % | 779 | 24 | % | 768 | 26 | % | |||||||||||||||||||||||||
|
Mortgage warehousing
|
1,435 | 14 | % | 1,455 | 19 | % | 1,354 | 14 | % | 1,309 | 9 | % | 1,762 | 13 | % | |||||||||||||||||||||||||
|
Consumer
|
7,696 | 30 | % | 6,861 | 31 | % | 5,881 | 32 | % | 5,047 | 32 | % | 3,181 | 28 | % | |||||||||||||||||||||||||
|
Unallocated
|
— | — | — | — | — | — | — | 40 | — | |||||||||||||||||||||||||||||||
|
Total
|
$ | 19,064 | 98 | % | $ | 16,015 | 100 | % | $ | 11,410 | 100 | % | $ | 9,791 | 100 | % | $ | 8,738 | 100 | % | ||||||||||||||||||||
In 1999, Horizon began a mortgage warehousing program. This program is described in
Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7
below and in the Notes to the Financial Statements in Item 8 below, which are incorporated herein
by reference. The greatest risk related to these loans is transaction and fraud risk. During
2010, Horizon processed approximately $2.8 billion in mortgage warehouse loans.
V. DEPOSITS
Information required by this section is found in Management’s Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and
related notes in Item 8 below, which are incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is found in Management’s Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and
related notes in Item 8 below, which are incorporated herein by reference.
VII. SHORT TERM BORROWINGS
The following is a schedule of statistical information relative to securities sold under agreements
to repurchase which are secured by Treasury and U.S. Government agency securities and mature within
one year. There were no other categories of short-term borrowings for which the average balance
outstanding during the period was 30 percent or more of stockholders’ equity at the end of the
period.
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Outstanding at year end
|
$ | 45,394 | $ | 46,236 | ||||
|
Approximate weighted-average interest rate at year-end
|
0.18 | % | 0.27 | % | ||||
|
Highest amount outstanding as of any month-end during
the year
|
$ | 49,656 | $ | 50,547 | ||||
|
Approximate average outstanding during the year
|
$ | 43,599 | $ | 44,887 | ||||
|
Approximate weighted-average interest during the year
|
0.19 | % | 0.59 | % | ||||
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(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
A cautionary note about forward-looking statements:
In its oral and written statements, Horizon
from time to time includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can include statements about
estimated cost savings, plans and objectives for future operations and expectations about Horizon’s
financial and business performance as well as economic and market conditions. They often can be
identified by the use of words like “expect,” “may,” “could,” “intend,” “project,” “estimate,”
“believe” or “anticipate.”
Horizon may include forward-looking statements in filings with the Securities and Exchange
Commission (“SEC”), such as this Form 10-K, in other written materials, and in oral statements made
by senior management to analysts, investors, representatives of the media, and others. It is
intended that these forward-looking statements speak only as of the date they are made, and Horizon
undertakes no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which the forward-looking statement is made or to reflect the occurrence of
unanticipated events.
By their nature, forward-looking statements are based on assumptions and are subject to risks,
uncertainties, and other factors. You are cautioned that actual results may differ materially from
those contained in the forward-looking statement. The discussion in Management’s Discussion and
Analysis of Financial Condition and Results of Operation in Item 7 of this Form 10-K lists some of
the factors that could cause Horizon’s actual results to vary materially from those expressed in or
implied by any forward-looking statements. Your attention is directed to this discussion.
Other risks and uncertainties that could affect Horizon’s future performance are set forth
immediately below in Item 1A — Risk Factors.
An investment in Horizon’s common stock is subject to risks inherent to our business. The material
risks and uncertainties that management believes currently affect Horizon are described below.
Before making an investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included or incorporated by reference in
this report. The risks and uncertainties described below and elsewhere are not the only ones facing
Horizon. Additional risks and uncertainties that management is not aware of or focused on or that
management currently deems immaterial may also impair Horizon’s business operations. This report is
qualified in its entirety by these risk factors.
If any of the following risks actually occur, Horizon’s financial condition and results of
operations could be materially and adversely affected. If this were to happen, the market price of
Horizon’s common stock could decline significantly, and you could lose all or part of your
investment.
Risks Related to our Business
As a financial institution, we are subject to a number of risks relating to our day-to-day
business.
As a financial institution, we are subject to a number of risks relating to our daily business.
Although we undertake a variety of efforts to manage and control those risks, many of the risks are
outside of our control. Among the risks we face are the following:
| • | Credit risk : the risk that loan customers or other parties will be unable to perform their contractual obligations; | ||
| • | Market risk: the risk that changes in market rates and prices will adversely affect the Company’s financial condition or results of operation; | ||
| • | Liquidity risk: the risk that Horizon or the Bank will have insufficient cash or access to cash to meet its operating needs; | ||
| • | Operational risk: the risk of loss resulting from fraud, inadequate or failed internal processes, people and systems, or external events; | ||
| • | Economic risk: the risk that the economy in the Company’s markets could decline further resulting in increased unemployment, decreased real estate values and increased loan charge-offs; and |
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(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
| • | Compliance risk: the risk of additional action by Horizon’s regulators or additional regulation could hinder the Company’s ability to do business profitably. |
The current economic environment poses significant challenges for us and could adversely affect our
financial condition and results of operations.
We are operating in a challenging and uncertain economic environment, including generally uncertain
national conditions and local conditions in our markets. The capital and credit markets have been
experiencing volatility and disruption since 2008. This presents financial institutions with
unprecedented circumstances and challenges which in some cases have resulted in large declines in
the fair values of investments and other assets, constraints on liquidity and significant credit
quality problems, including severe volatility in the valuation of real estate and other collateral
supporting loans. Our financial statements have been prepared using values and information
currently available to us, but given this volatility, the values of assets and liabilities recorded
in the financial statements could change rapidly, resulting in material future adjustments in asset
values and the allowance for loan losses, which could negatively impact our ability to meet
regulatory capital requirements and maintain sufficient liquidity. The risks associated with our
business become more acute in periods of a slowing economy or slow growth such as we began
experiencing in the latter half of 2008 and which continued throughout 2010. Financial institutions
continue to be affected by sharp declines in the real estate market and constrained financial
markets. While we are taking steps to decrease and limit our exposure to residential construction
and land development loans and home equity loans, we nonetheless retain direct exposure to the
residential and commercial real estate markets, and we are affected by these events.
Continued declines in real estate values, home sales volumes and financial stress on borrowers as a
result of the uncertain economic environment, including job loss, could have an adverse effect on
our borrowers or their customers, which could adversely affect our financial condition and results
of operations. In addition, the national economic recession or further deterioration in local
economic conditions in our markets could drive losses beyond that which is provided for in our
allowance for loan losses and result in the following other consequences: increases in loan
delinquencies, problem assets and foreclosures; demand for our products and services may decline;
deposits may decrease, which would adversely impact our liquidity position; and collateral for our
loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power,
and reducing the value of assets and collateral associated with our existing loans.
Our financial performance may be adversely impacted if we are unable to continue to grow our
commercial and consumer loan portfolios, obtain low-cost funds and compete with other providers of
financial services.
Our ability to maintain our history of record earnings year after year will depend, in large part,
on our ability to continue to grow our loan portfolios and obtain low-cost funds. For the past
five years, we focused on increasing consumer loans, and we intend to continue to emphasize and
grow consumer, as well as commercial loans in the foreseeable future. This represented a shift in
our emphasis from prior years when we focused on mortgage banking services, which generated a large
portion of our income during those years.
We have also funded our growth with low-cost consumer deposits, and our ability to sustain our
growth will depend in part on our continued success in attracting and retaining such deposits or
finding other sources of low-cost funds.
Another factor in maintaining our history of record earnings will be our ability to expand our
scope of available financial services to our customers in an increasingly competitive environment.
In addition to other banks, our competitors include credit unions, securities brokers and dealers,
mortgage brokers, mortgage bankers, investment advisors, and finance and insurance companies.
Competition is intense in most of our markets. We compete on price and service with our
competitors. Competition could intensify in the future as a result of industry consolidation, the
increasing availability of products and services from non-banks, greater technological developments
in the industry, and banking reform.
The recent repeal of federal prohibitions on payment of interest on demand deposits could increase
our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit
accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011,
financial institutions could commence offering
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
interest on demand deposits to compete for customers. We do not yet know what interest rates
other institutions may offer if any. Our interest expense will increase and our net interest margin
will decrease if we begin offering interest on demand deposits to attract additional customers or
maintain current customers, which could have a material adverse effect on our financial condition
and results of operations.
Our commercial and consumer loans expose us to increased credit risks.
We have a large percentage of commercial and consumer loans. Commercial loans generally have
greater credit risk than residential mortgage loans because repayment of these loans often depends
on the successful business operations of the borrowers. These loans also typically have much
larger loan balances than residential mortgage loans. Consumer loans generally involve greater
risk than residential mortgage loans because they are unsecured or secured by assets that
depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving
protections with respect to these types of loans, there can be no guarantee that we will not suffer
unexpected losses, and recently, we have experienced an increase in the default rates in our
consumer loan portfolio, particularly relating to indirect auto loans.
Our holdings of construction, land and home equity loans, may pose more credit risk than other
types of mortgage loans.
In light of current economic conditions, construction loans, loans secured by commercial real
estate and home equity loans are considered more risky than other types of mortgage loans. Due to
the disruptions in credit and housing markets, real estate values have decreased in most areas of
the U.S., and many of the developers to whom we lend experienced a decline in sales of new homes
from their projects. As a result of this market disruption, some of our land and construction
loans have become non-performing as developers are unable to build and sell homes in volumes large
enough for orderly repayment of loans and as other owners of such real estate (including
homeowners) were unable to keep up with their payments. We believe we have established appropriate
reserves on our financial statements to cover the credit risk of these loan portfolios. However,
there can be no assurance that losses will not exceed our reserves, and ultimately result in a
material level of charge-offs, which could adversely impact our results of operations, liquidity
and capital.
The allowance for loan losses may prove inadequate or be negatively affected by credit risk
exposures.
Our business depends on the creditworthiness of our customers. We periodically review the
allowance for loan and lease losses for adequacy considering economic conditions and trends,
collateral values, and credit quality indicators, including past charge-off experience and levels
of past due loans and non-performing assets. There is no certainty that the allowance for loan
losses will be adequate over time to cover credit losses in the portfolio because of unanticipated
adverse changes in the economy, market conditions or events adversely affecting specific customers,
industries or markets. If the credit quality of the customer base materially decreases, if the
risk profile of a market, industry or group of customers changes materially, or if the allowance
for loan losses is not adequate, our business, financial condition, liquidity, capital, and results
of operations could be materially adversely affected.
Changes in market interest rates could adversely affect our financial condition and results of
operations.
Our financial condition and results of operations are significantly affected by changes in market
interest rates. Our results of operations depend substantially on our net interest income, which is
the difference between the interest income that we earn on our interest-earning assets and the
interest expense that we pay on our interest-bearing liabilities. Our profitability depends on our
ability to manage our assets and liabilities during periods of changing market interest rates. If
rates increase rapidly as a result of an improving economy, we may have to increase the rates paid
on our deposits and borrowed funds more quickly than loans and investments re-price, resulting in a
negative impact on interest spreads and net interest income. The impact of rising rates could be
compounded if deposit customers move funds from savings accounts to higher rate certificate of
deposit accounts. Conversely, should market interest rates fall below current levels, our net
interest margin could also be negatively affected, as competitive pressures could keep us from
further reducing rates on our deposits, and prepayments and curtailments on assets may continue.
Such movements may cause a decrease in our interest rate spread and net interest margin, and
therefore, decrease our profitability.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Changes in interest rates also could affect loan volume. For instance, an increase in interest
rates could cause a decrease in the demand for mortgage loans (and other loans), which could result
in a significant decline in our revenue stream.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in
interest rates may affect the average life of loans and mortgage-related securities. Increases in
interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay
adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans
and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs.
Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to
reinvest the cash received from such prepayments in loans or other investments that have interest
rates that are comparable to the interest rates on existing loans and securities.
A continued economic slowdown in Northwestern Indiana and Southwestern Michigan could affect our
business.
Our primary market area for deposits and loans consists of LaPorte and Porter Counties in
Northwestern Indiana and Berrien County in Southwestern Michigan. During 2010, unemployment rates
increased or remained at or near record levels in our primary market area, resulting in a rise in
consumer delinquencies and bankruptcy filings. The continued economic slowdown could hurt our
business. The possible consequences of such a continued downturn could include the following:
| • | increases in loan delinquencies and foreclosures; | ||
| • | declines in the value of real estate and other collateral for loans; | ||
| • | an increase in loans charged off; | ||
| • | a decline in the demand for our products and services; | ||
| • | an increase in non-accrual loans and other real estate owned. |
The loss of key members of our senior management team could affect our ability to operate
effectively.
We depend heavily on the services of our existing senior management team, particularly our CEO
Craig M. Dwight, to carry out our business and investment strategies. As we continue to grow and
expand our business and our locations, products and services, we will increasingly need to rely on
Mr. Dwight’s experience, judgment and expertise as well as that of the other members of our senior
management team and will also need to continue to attract and retain qualified banking personnel at
all levels. Competition for such personnel is intense in our geographic market areas. In addition,
as a TARP recipient, the ARRA limits the amount of incentive compensation that can be paid to
certain executives. The effect could be to limit our ability to attract and retain senior
management in the future. If we are unable to attract and retain talented people, our business
could suffer. The loss of the services of any senior management personnel, particularly Mr. Dwight
or the inability to recruit and retain qualified personnel in the future, could have a material
adverse effect on our consolidated results of operations, financial condition and prospects.
We may need to raise additional capital in the future, and such capital may not be available when
needed or at all.
We may need to raise additional capital in the future to fund acquisitions and to provide us with
sufficient capital resources and liquidity to meet our commitments, regulatory capital requirements
and business needs, particularly if our asset quality or earnings were to deteriorate
significantly. Although we are currently, and have historically been, “well capitalized” for
regulatory purposes, our capital levels are not far in excess of the well capitalized threshold,
and we have been required to maintain increased levels of capital in the past in connection with
certain acquisitions. Additionally, we periodically explore acquisition opportunities with other
financial institutions, some of which are in distressed financial condition. Any future
acquisition, particularly the acquisition of a significantly troubled institution or an institution
of comparable size to us, may require us to raise additional capital in order to obtain regulatory
approval and/or to remain well capitalized.
Our ability to raise additional capital, if needed, will depend on, among other things, conditions
in the capital markets at that time, which are outside of our control, and our financial
performance. Economic conditions and the loss of confidence in financial institutions may increase
our cost of funding and limit access to certain customary sources of
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(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
capital, including inter-bank borrowings, repurchase agreements and borrowings from the
discount window of the Federal Reserve.
We cannot guarantee that such capital will be available on acceptable terms or at all. Any
occurrence that may limit our access to the capital markets, such as a decline in the confidence of
debt purchasers, our depositors or counterparties participating in the capital markets may
adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity.
Moreover, if we need to raise capital in the future, we may have to do so when many other financial
institutions are also seeking to raise capital and would have to compete with those institutions
for investors. An inability to raise additional capital on acceptable terms when needed could have
a materially adverse effect on our businesses, financial condition and results of operations and
may restrict our ability to grow.
Potential acquisitions may disrupt our business and dilute stockholder value.
We periodically evaluate merger and acquisition opportunities and conduct due diligence activities
related to possible transactions with other financial institutions and financial services
companies. We generally seek merger or acquisition partners that are culturally similar and possess
either significant market presence or have potential for improved profitability through financial
management, economies of scale or expanded services. Acquiring other banks, businesses, or branches
involves various risks commonly associated with acquisitions, including, among other things:
| • | Potential exposure to unknown or contingent liabilities of the target company, | ||
| • | Exposure to potential asset quality issues of the target company, | ||
| • | Potential disruption to our business, | ||
| • | Potential diversion of our management’s time and attention away from day-to-day operations, | ||
| • | The possible loss of key employees, business and customers of the target company, | ||
| • | Difficulty in estimating the value of the target company, and | ||
| • | Potential problems in integrating the target company’s systems, customers and employees with ours. |
As a result, merger or acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving the payment of cash or the issuance of our debt or equity
securities may occur at any time. Acquisitions typically involve the payment of a premium over book
and market values, and, therefore, some dilution of our tangible book value and net income per
common share may occur in connection with any future transaction. To the extent we were to issue
additional common shares in any such transaction, our current shareholders would be diluted and
such an issuance may have the effect of decreasing our stock price, perhaps significantly.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an acquisition could have a
material adverse effect on our financial condition and results of operations.
The preparation of our financial statements requires the use of estimates that may vary from actual
results.
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make significant
estimates that affect the financial statements. One of our most critical estimates is the level of
the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide
absolute assurance that we will not have to increase the allowance for loan losses and/or sustain
loan losses that are significantly higher than the provided allowance.
Our mortgage warehouse and indirect lending operations are subject to a higher fraud risk than our
other lending operations.
We buy loans originated by mortgage bankers and automobile dealers. Because we must rely on the
mortgage bankers and automobile dealers in making and documenting these loans, there is an
increased risk of fraud to us on the part of the third-party originators and the underlying
borrowers. In order to guard against this increased risk, we perform investigations on the loan
originators with whom we do business, and we review the loan files and loan documents we
purchase to attempt to detect any irregularities or legal noncompliance. However, there is no
guarantee that our procedures will detect all cases of fraud or legal noncompliance.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Our mortgage lending profitability could be significantly reduced if we are not able to resell mortgages or experience other problems with this process.
Currently, we sell a substantial portion of the mortgage loans we originate. The profitability of
our mortgage banking operations depends in large part upon our ability to aggregate a high volume
of loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the
existence of an active secondary market and our ability to profitably sell loans into that market.
Our ability to sell mortgage loans readily is dependent upon the availability of an active
secondary market for single-family mortgage loans, which in turn depends in part upon the
continuation of programs currently offered by Fannie Mae, Freddie Mac and Ginnie Mae (the
“Agencies”) and other institutional and non-institutional investors. These entities account for a
substantial portion of the secondary market in residential mortgage loans. Some of the largest
participants in the secondary market, including the Agencies, are government-sponsored enterprises
whose activities are governed by federal law. Any future changes in laws that significantly affect
the activity of such government-sponsored enterprises could, in turn, adversely effect our
operations.
In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S.
government. Although to date, the conservatorship has not had a significant or adverse effect on
our operations, it is currently unclear whether further changes would significantly and adversely
affect our operations. In addition, our ability to sell mortgage loans readily is dependent upon
our ability to remain eligible for the programs offered by the Agencies and other institutional and
non-institutional investors. Our ability to remain eligible may also depend on having an acceptable
peer-relative delinquency ratio for Federal Housing Authority (“FHA”) and maintaining a delinquency
rate with respect to Ginnie Mae pools that are below Ginnie Mae guidelines. In the case of Ginnie
Mae pools, we have repurchased delinquent loans from them in the past to maintain compliance with
the minimum required delinquency ratios. Although these loans are typically insured as to principal
by the FHA, such repurchases increase our capital and liquidity needs, and there can be no
assurance that we will have sufficient capital or liquidity to continue to purchase such loans out
of the Ginnie Mae pools if required to do so.
Any significant impairment of our eligibility with any of the Agencies could materially and
adversely affect our operations. Further, the criteria for loans to be accepted under such programs
may be changed from time-to-time by the sponsoring entity which could result in a lower volume of
corresponding loan originations. The profitability of participating in specific programs may vary
depending on a number of factors, including our administrative costs of originating and purchasing
qualifying loans and our costs of meeting such criteria.
We are exposed to intangible asset risk; specifically, our goodwill may become impaired.
As of December 31, 2010, we had $8.7 million of goodwill and other intangible assets. A significant
and sustained decline in our stock price and market capitalization, a significant decline in our
expected future cash flows, a significant adverse change in the business climate, or slower growth
rates could result in the impairment of goodwill. If we were to conclude that a future write-down
of our goodwill is necessary, then we would record the appropriate charge, which could be
materially adverse to our operating results and financial position. For further discussion, see
Notes 1 and 9, “Nature of Operations and Summary of Significant Accounting Policies” and
“Intangible Assets”, to the Consolidated Financial Statements included in Item 7. of this Annual
Report on Form 10-K.
Financial problems at the Federal Home Loan Bank of Indianapolis may adversely affect our financial
condition and our ability to borrow monies in the future.
Horizon owns stock in the Federal Home Loan Bank of Indianapolis (“FHLBI”) with a carrying value of
$11.4 million (as of December 31, 2010) in order to qualify for membership in the Federal Home Loan
Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The
FHLBI stock also entitles us to dividends from the FHLBI. Horizon recognized dividend income of
approximately $217,000 and $315,000 in 2010 and 2009, respectively. Due to various financial
difficulties in the financial institution industry in the last few years, including the write-down
of various mortgage-backed securities held by the FHLBI (which lowered its regulatory capital
levels), the FHLBI temporarily
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
suspended dividends during the first quarter of 2009. When the dividends were finally paid,
they were reduced from the dividend rate paid for the previous quarter. In an extreme situation, it
is possible that the capitalization of a Federal Home Loan Bank, including the FHLBI, could be
substantially diminished or reduced to zero. Consequently, given that there is no market for the
FHLBI stock we hold, we believe that there is a risk that the investment could be deemed
other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect
Horizon’s results of operations and financial condition. If the FHLBI were to cease operations, or
if we were required to write-off the investment in the FHLBI, our business, financial condition,
liquidity, capital and results of operations may be materially adversely affected.
Additionally, Horizon’s total current borrowing capacity with the FHLBI is currently $302.9
million, and we have outstanding borrowings of $88.8 million with the FHLBI. Generally, the loan
terms from the FHLBI are better than the terms Horizon can receive from other sources making it
cheaper to borrow money from the FHLBI. Continued and additional financial difficulties at the
FHLBI (or the complete failure of the FHLBI) could reduce or eliminate our additional borrowing
capacity with the FHLBI which could force us to borrow money from other sources. Such other monies
may not be available when we need them or, more likely, will be available at higher interest rates
and on less advantageous terms, which will impact our net income and could impact our ability to
grow.
The TARP lending goals may not be attainable and may adversely affect our business and asset
quality.
Congress and the bank regulators have encouraged recipients of TARP capital, including Horizon, to
use such capital to make more loans, and it may not be possible to safely, soundly and profitably
make sufficient loans to creditworthy persons in the current economy to satisfy such goals.
Congressional demands for additional lending by TARP capital recipients, and regulatory demands for
demonstrating and reporting such lending are increasing. On November 12, 2008, the bank regulatory
agencies issued a statement encouraging banks to, among other things, “lend prudently and
responsibly to creditworthy borrowers” and to “work with borrowers to preserve homeownership and
avoid preventable foreclosures.” Horizon continues to lend (and have been able to expand our
lending using the funds Horizon received through the Capital Purchase Program) and to report our
lending to the Treasury. The future demands for additional lending, however, are unclear and
uncertain, and Horizon could be forced to make loans that involve risks or terms that Horizon would
not otherwise find acceptable or in our shareholders’ best interest. Such loans could adversely
affect our results of operations and financial condition, and may be in conflict with bank
regulations and requirements as to liquidity and capital. The profitability of funding such loans
using deposits may also be adversely affected by increased FDIC insurance premiums.
We are subject to extensive regulation and changes in laws, regulations and policies that could
adversely affect our business.
Our operations are subject to extensive regulation by federal agencies. See “Supervision and
Regulation” in the description of our Business in Part I of this Form 10-K for detailed information
on the laws and regulations to which we are subject. As apparent from the recent Emergency
Economic Stabilization Act (EESA), Troubled Asset Relief Program (TARP), the American Recovery and
Reinvestment Act of 2009 (ARRA) and the Dodd-Frank Act of 2010 legislation, changes in applicable
laws, regulations or regulator policies can materially affect our business. The likelihood of any
major changes in the future and their effects are impossible to determine.
In addition to the EESA, TARP, ARRA and Dodd-Frank mentioned above, federal and state governments
could pass additional legislation responsive to current credit conditions. As an example, Horizon
Bank could experience higher credit losses because of federal or state legislation or regulatory
action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay
under existing loan contracts. Also, Horizon Bank could experience higher credit losses because of
federal or state legislation or regulatory action that limits its ability to foreclose on property
or other collateral or makes foreclosure less economically feasible.
The new laws described above, together with additional actions announced by the Treasury Department
(Treasury) and other regulatory agencies continue to develop. It is not clear at this time what
impact, EESA, TARP, Dodd-Frank other liquidity and funding initiatives of the Treasury and other
bank regulatory agencies that have been previously announced, and any additional programs that may
be initiated in the future, will have on the financial markets and the financial services industry.
The extreme levels of volatility and limited credit availability currently being experienced could
continue to affect
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
the U.S.
banking industry and the broader U.S. and global economies, which will have an effect
on all financial institutions, including Horizon.
Our inability to continue to accurately process large volumes of transactions could adversely
impact our business and financial results.
In the normal course of business, we process large volumes of transactions. If systems of internal
control should fail to work as expected, if systems are used in an unauthorized manner, or if
employees subvert the system of internal controls, significant losses could result.
We process large volumes of transactions on a daily basis and are exposed to numerous types of
operational risk. Operational risk resulting from inadequate or failed internal processes, people
and systems includes the risk of fraud by persons inside or outside the company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and systems, and
breaches of the internal control system and compliance requirements. This risk of loss also
includes the potential legal actions that could arise as a result of the operational deficiency or
as a result of noncompliance with applicable regulatory standards.
We establish and maintain systems of internal operational controls that are designed to provide us
with timely and accurate information about our level of operational risk. While not foolproof,
these systems have been designed to manage operational risk at appropriate, cost-effective levels.
Procedures also exist that are designed to ensure that policies relating to conduct, ethics and
business practices are followed. From time to time, losses from operational risk may occur,
including the effects of operational errors.
While we continually monitor and improve the system of internal controls, data processing systems
and corporate-wide processes and procedures, there can be no assurance that future losses will not
occur.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan and other systems. While we have
policies and procedures designed to prevent or limit the effect of the failure, interruption or
security breach of our information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur or, if they do occur, that they will be
adequately or timely addressed. The occurrence of any failures, interruptions or security breaches
of our information systems could damage our reputation, result in a loss of customer business,
subject us to additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability, any of which could have a material adverse effect on our financial condition
and results of operations.
We continually encounter technological changes.
The financial services industry is continually undergoing rapid technological change with frequent
introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce
costs. Our future success depends, in part, upon our ability to address the needs of our customers
by using technology to provide products and services that will satisfy customer demands, as well as
to create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements, and we may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products
and services to our customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact on our business and,
in turn, our financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to many different industries and counterparties, and we
routinely execute transactions with counterparties in the
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
financial services industry, including brokers and dealers, commercial banks, investment
banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose
us to credit risk in the event of default by our counterparty or client. In addition, our credit
risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at
prices not sufficient to recover the full amount of the loan or derivative exposure due us. There
is no assurance that any such losses would not materially and adversely affect our results of
operations or earnings.
Risks Related to our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell our common stock at times or at prices you find attractive.
Although our common stock is listed on the NASDAQ Global Market, our stock price constantly
changes, and we expect our stock price to continue to fluctuate in the future. Our stock price is
impacted by a variety of factors, some of which are beyond our control.
These factors include:
| • | variations in our operating results or the quality of our assets; | ||
| • | operating results that vary from the expectations of management, securities analysts and investors; | ||
| • | increases in loan losses, non-performing loans and other real estate owned; | ||
| • | changes in expectations as to our future financial performance; | ||
| • | announcements of new products, strategic developments, acquisitions and other material events by us or our competitors; | ||
| • | the operating and securities price performance of other companies that investors believe are comparable to us; | ||
| • | actual or anticipated sales of our equity or equity-related securities; | ||
| • | our past and future dividend practice; | ||
| • | our creditworthiness; | ||
| • | interest rates; | ||
| • | the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing; | ||
| • | developments with respect to financial institutions generally; and | ||
| • | economic, financial, geopolitical, regulatory, congressional or judicial events that affect us or the financial markets. |
In addition the stock market in general has recently experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market price of securities
issued by many companies and particularly those in the financial services and banking sector,
including for reasons unrelated to their operating performance. These broad market fluctuations
may adversely affect our stock price, notwithstanding our operating results.
Because our stock is thinly traded, it may be more difficult for you to sell your shares or buy
additional shares when you desire to do so and the price may be volatile.
Although our common stock has been listed on the NASDAQ stock market since December 2001, our
common stock is thinly traded. The prices of thinly traded stocks, such as ours, are typically
more volatile than stocks traded in a large, active public market and can be more easily impacted
by sales or purchases of large blocks of stock. Thinly traded stocks are also less liquid, and
because of the low volume of trades, you may be unable to sell your shares when you desire to do
so.
Because of our participation in the TARP Capital Purchase Program, Horizon is subject to various
restrictions on dividends, share repurchases and executive compensation.
Horizon is a participant in the Capital Purchase Program, which is a component program of TARP.
Pursuant to the agreements Horizon entered into as part of the Capital Purchase Program, Horizon is
unable to declare dividend payments on our common shares if Horizon is in arrears on the payment of
dividends on the Series A Preferred Shares Horizon issued to the Treasury. Further, Horizon is not
permitted to increase dividends on our common shares above the amount
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
of the last quarterly cash dividend per common share declared prior to October 14, 2008 ($0.17
per common share) without the Treasury’s approval until December 23, 2011, unless all of the Series
A Preferred Shares have been redeemed or transferred by the Treasury to unaffiliated third parties.
In addition, our ability to repurchase our shares is restricted. The consent of the Treasury
generally is required for us to make any share repurchase (other than in connection with the
administration of any employee benefit plan in the ordinary course of business and consistent with
past practice) until December 23, 2011, unless all of the Series A Preferred Shares have been
redeemed or transferred by the Treasury to unaffiliated third parties. Further, our common shares
may not be repurchased if Horizon is in arrears on the payment of Series A Preferred Share
dividends to the Treasury.
As a recipient of government funding under the Capital Purchase Program, Horizon must also comply
with the executive compensation and corporate governance standards imposed by the ARRA and the
standards established by the Secretary of the Treasury under the ARRA, for so long as the Treasury
holds any of our securities or upon exercise of the Warrant Horizon issued to the Treasury as part
of the Capital Purchase Program, excluding any period during which the Treasury holds only the
Warrant (the “TARP Period”). Effective June 15, 2009, the Secretary of the Treasury established
executive compensation and corporate governance standards applicable to TARP recipients, including
Horizon, by promulgating an Interim Final Rule under 31 C.F.R. Part 30 (the “Interim Final Rule”).
The ARRA and the Interim Final Rule impose limitations on our executive compensation practices by:
| • | Limiting the deductibility, for U.S. federal income tax purposes, of compensation paid to any of our Senior Executive Officers (as defined in the Interim Final Rule) to $500,000 per year; | ||
| • | Prohibiting the payment or accrual of any bonus, retention award or incentive compensation to our five most highly-compensated employees, except in the form and under the limited circumstances permitted by the Interim Final Rule; | ||
| • | Prohibiting the payment of golden parachute payments (as defined in the Interim Final Rule) to our Senior Executive Officers or any of our next five most highly-compensated employees upon a departure from Horizon or due to a change in control of Horizon, except for payments for services performed or benefits accrued; | ||
| • | Requiring Horizon to “clawback” any bonus, retention award or incentive compensation paid (or under a legally binding obligation to be paid) to a Senior Executive Officer or any of our next 20 most highly-compensated employees if the payment was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; | ||
| • | Prohibiting Horizon from maintaining any employee compensation plan (as defined in the Interim Final Rule) that would encourage the manipulation of our reported earnings to enhance the compensation of any of our employees; | ||
| • | Prohibiting Horizon from maintaining compensation plans and arrangements for our Senior Executive Officers that encourage our Senior Executive Officers to take unnecessary and excessive risks that threaten the value of Horizon; | ||
| • | Prohibiting Horizon from providing (formally or informally) “gross-ups” to any of our Senior Executive Officers or our next 20 most highly-compensated employees; and | ||
| • | Subjecting any bonus, retention award or other compensation paid before February 17, 2009 to our Senior Executive Officers or our next 20 most highly-compensated employees to retroactive review by the Treasury to determine whether any such payments were inconsistent with the purposes of TARP or otherwise contrary to the public interest. |
The ARRA and the Interim Final Rule also required that the Horizon Board of Directors adopt a
Company-wide policy regarding “excessive or luxury expenditures,” which Horizon has done.
Although Horizon was already in compliance with many of these standards and limitations prior to
its participation in the Capital Purchase Program and the subsequent adoption of the ARRA and the
Interim Final Rule, these standards and limitations decrease (in some cases substantially)
Horizon’s discretion over certain decisions regarding its dividend practices and how it compensates
its executive officers and other employees. The limitations on compensation may have the effect of
limiting Horizon’s ability to attract and retain executive officers and other employees which will
be detrimental to our long-term success.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Our ability to repurchase the preferred shares issued to the Treasury (and therefore obtain
relief from the limitations and restrictions of TARP and ARRA) is limited.
Any redemption of the securities sold to the Treasury requires prior Federal Reserve and Treasury
approval. Based on recently issued Federal Reserve guidelines, institutions seeking to redeem the
preferred stock issued pursuant to the Capital Purchase Program must demonstrate an ability to
access the long-term debt markets without reliance on the FDIC’s Temporary Liquidity Guarantee
Program, successfully demonstrate access to public equity markets and meet a number of additional
requirements and considerations before they can redeem any securities sold to the Treasury.
On November 10, 2010, Horizon repurchased 6,250 of the 25,000 outstanding Series A Preferred Shares
held by the Treasury. Horizon paid $6.25 million to repurchase the preferred shares along with the
accrued dividend for the shares repurchased. Horizon has also applied for a $19 million loan under
the recently implemented Small Business Loan Fund program (the “SBLF”), and if its application is
approved, Horizon plans to repurchase the remaining $18.5 million in Series A Preferred Shares from
the Treasury with those proceeds. Enacted into law as part of the Small Business Jobs Act of 2010,
the SBLF is a $30 billion fund that encourages lending to small businesses by providing Tier 1
capital to qualified community banks with assets of less than $10 billion. The SBLF program
provides an option for community banks to refinance preferred stock issued to the Treasury through
the Capital Purchase Program, and the SBLF program does not impose many of the restrictions that
Horizon is currently subject to under TARP.
However, there is no guarantee that Horizon’s application under SBLF will be approved and Horizon
will be able to redeem the remaining securities held by the Treasury.
Provisions in our articles of incorporation, our by-laws, and Indiana law may delay or prevent an
acquisition of us by a third party.
Our articles of incorporation and by-laws and Indiana law contain provisions which have certain
anti-takeover effects. While the purpose of these provisions is to strengthen the negotiating
position of the board in the event of a hostile takeover attempt, the overall effects of these
provisions may be to render more difficult or discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a larger block of our shares, and the removal of incumbent
directors and key management.
Our articles of incorporation provide for a staggered board, which means that only one-third of our
board can be replaced by shareholders at any annual meeting. Our articles also provide that our
directors may only be removed without cause by shareholders owning 70% or more of our outstanding
common stock. Furthermore, our articles provide that only our board of directors, and not our
shareholders, may adopt, alter, amend and repeal our by-laws.
Our articles also preempt Indiana law with respect to business combinations with a person who
acquires 10% or more of our common stock and provide that such transactions are subject to
independent and super-majority shareholder approval requirements unless certain pricing and board
pre-approval requirements are satisfied.
Our by-laws do not permit cumulative voting of shareholders in the election of directors, allowing
the holders of a majority of our outstanding shares to control the election of all our directors,
and our directors are elected by plurality (not majority) voting. Our by-laws also establish
detailed procedures that shareholders must follow if they desire to nominate directors for election
or otherwise present issues for consideration at a shareholders’ meeting. We also have a mandatory
retirement age for directors.
These and other provisions of our governing documents and Indiana law are intended to provide the
board of directors with the negotiating leverage to achieve a more favorable outcome for our
shareholders in the event of an offer for the company. However, there is no assurance that these
same anti-takeover provisions could not have the effect of delaying, deferring or preventing a
transaction or a change in control that might be in the best interest of our shareholders.
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Not applicable.
The main office and full service branch of Horizon and the Bank is located at 515 Franklin Square,
Michigan City, Indiana. The building located across the street from the main office of Horizon and
the Bank, at 502 Franklin Square, houses the credit administration, operations, facilities and
purchasing, and information technology departments of the Bank. In addition to these principal
facilities, the Bank has 21 sales offices located at:
|
3631 South Franklin Street
|
Michigan City | Indiana | ||
|
113 West First Street
|
Wanatah | Indiana | ||
|
1500 West Lincolnway
|
LaPorte | Indiana | ||
|
423 South Roosevelt Street
|
Chesterton | Indiana | ||
|
4208 North Calumet
|
Valparaiso | Indiana | ||
|
902 Lincolnway
|
Valparaiso | Indiana | ||
|
2650 Willowcreek Road
|
Portage | Indiana | ||
|
8590 Broadway
|
Merrillville | Indiana | ||
|
10429 Calumet Avenue
|
Munster | Indiana | ||
|
17400 State Road 23
|
South Bend | Indiana | ||
|
1909 East Bristol Street
|
Elkhart | Indiana | ||
|
4574 Elkhart Road
|
Goshen | Indiana | ||
|
1321 119
th
Street
|
Whiting | Indiana | ||
|
1349 Calumet Avenue
|
Hammond | Indiana | ||
|
1300 North Main Street
|
Crown Point | Indiana | ||
|
811 Ship Street
|
St. Joseph | Michigan | ||
|
2608 Niles Road
|
St. Joseph | Michigan | ||
|
1041 East Napier Avenue
|
Benton Harbor | Michigan | ||
|
500 West Buffalo Street
|
New Buffalo | Michigan | ||
|
6801 West U.S. 12
|
Three Oaks | Michigan | ||
|
1300 West Centre Avenue
|
Portage | Michigan |
Horizon owns all of the facilities, except for the Portage, Michigan office, which is leased.
Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of
their business. Management does not expect that the outcome of any such proceedings will have a
material adverse effect on our consolidated financial position or results of operations. In
addition, Horizon is engaged in the following legal proceedings:
On September 2, 2010, Capitol Bancorp and one of its subsidiaries, Michigan Commerce Bank, filed a
Verified Complaint in Kalamazoo County Circuit Court, Case No. 2010 — 0300-CK and obtained an
ex-parte temporary restraining order in Michigan state court. The Complaint asserted a variety of
claims against Horizon and certain ex-employees of Michigan Commerce Bank including, without
limitation, breach of contract, tortious interference, misappropriation of trade secretes, and
civil conspiracy. The temporary restraining order and preliminary injunction primarily sought to
restrain the ex-employees from soliciting or doing business with any of Michigan Commerce Bank’s
customers and from using or disclosing any of Michigan Commerce Bank’s confidential information. A
hearing on the preliminary injunction was held, and the court dissolved the temporary restraining
order and denied the preliminary injunction. After the temporary restraining order was dissolved,
Plaintiffs stipulated to the dismissal of all the ex-employees on September 9, 2010, except
one. In addition, Capitol Bancorp and Michigan Commerce Bank have amended their complaint to
reflect the dismissal of these ex-employees as defendants but have yet to file the amended
complaint pending the parties’ settlement discussions.
As a result, this matter now primarily involves damage claims against one of the ex-employees for
alleged breaches of his duty of loyalty to Michigan Commerce Bank and alleged breaches of the
confidentiality agreement he signed while employed at Michigan Commerce Bank and claims against
Horizon for alleged breaches of an employee non-solicitation
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
provision contained in a confidentiality agreement between Horizon, Capitol Bancorp and
certain of its affiliates (which was entered into in 2009 in connection with Horizon’s
investigation of potentially purchasing two affiliate banks of Capitol Bancorp) and similar claims
relating to the hiring of the ex-employee who remains a party to the lawsuit. On February 16, 2011,
the parties met to attempt to settle the case through mediation; but were unsuccessful in doing so.
Horizon continues to evaluate the case as it moves through the discovery phase and will continue to
attempt to settle the case if it is reasonable to do so.
On July 23, 2010, the bankruptcy trustee for AmerLink, LTD., filed a Complaint in the United States
Bankruptcy Court of the Eastern District of North Carolina, Wilson Division seeking to recover up
to $25,000,000 in alleged damages and related costs from multiple defendants, including Horizon
Bank, N.A. (f/k/a Horizon Trust & Investment Management) arising out of the bankruptcy of AmerLink.
The Complaint primarily alleges that the prior owners of AmerLink engaged in a series of fraudulent
and/or improper transactions in connection with the formation of AmerLink’s Employee Stock
Ownership Plan (ESOP). Horizon served as the ESOP trustee for AmerLink’s ESOP plan. While Horizon
was preparing to file a motion to dismiss itself from the action, the bankruptcy trustee agreed to
voluntarily dismiss Horizon from the case on January 24, 2011 without prejudice. Since the
dismissal was without prejudice, the case could be re-filed against Horizon, but the trustee
indicated that she does not foresee re-filing.
SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT
|
Robert C. Dabagia
|
72 | Chairman of Horizon since 1998; Chief Executive Officer of Horizon and the Bank until July 1, 2001. | ||||
|
Craig M. Dwight
|
54 | Chairman and Chief Executive Officer of the Bank since January 2003; President and Chief Executive Officer of Horizon and the Bank since July 1, 2001. | ||||
|
Thomas H. Edwards
|
58 | President and Chief Operating Officer of the Bank since January 2003. | ||||
|
Mark E. Secor
|
44 | Chief Financial Officer of Horizon and the Bank since January 2009. Vice President, Chief Investment and Asset Liability Manager since June 2007, Chief Financial Officer of St. Joseph Capital Corp., Mishawaka, Indiana since January 2004. | ||||
|
James D. Neff
|
51 | Corporate Secretary of Horizon since 2007; Executive Vice President-Mortgage Banking of the Bank since January 2004; Senior Vice President of the Bank since October 1999. |
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
Repurchases of Securities
There were no purchases by the Company of its common stock during the fourth quarter of 2010.
Performance Graph
The Securities and Exchange Commission requires Horizon to include a line graph comparing Horizon’s
cumulative five-year total shareholder returns on the Common Shares with market and industry
returns over the past five years. SNL Financial LC prepared the following graph. The return
represented in the graph assumes the investment of $100 on January 1, 2006, and further assumes
reinvestment of all dividends. The Common Shares began trading on the NASDAQ Global Market February
1, 2007. Prior to that date, the Common Shares were traded on the NASDAQ Capital Market.
| Period Ending | ||||||||||||||||||||||||
| December 31 | December 31 | December 31 | December 31 | December 31 | December 31 | |||||||||||||||||||
| Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
|
Horizon Bancorp
|
100.00 | 106.30 | 101.58 | 51.73 | 70.28 | 118.77 | ||||||||||||||||||
|
Russell 2000
|
100.00 | 118.37 | 116.51 | 77.15 | 98.11 | 124.46 | ||||||||||||||||||
|
SNL Bank $1B-$5B
|
100.00 | 115.72 | 84.29 | 69.91 | 50.11 | 56.81 | ||||||||||||||||||
|
SNL Micro Cap Bank
|
100.00 | 112.00 | 93.62 | 57.95 | 42.73 | 44.00 | ||||||||||||||||||
|
Source : SNL Financial LC, Charlottesville, VA
|
||
|
© 2011
|
www.snl.com |
32
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Horizon Bancorp
(Table dollars in thousands except per share data)
(Table dollars in thousands except per share data)
The following chart, prepared by the investment banking firm of Keefe, Bruyette and Woods
compares the change in market price of Horizon’s stock to that of publicly traded banks in Indiana
and Michigan.
| Period Ending | ||||||||||||||||||||||||
| December 31 | December 31 | December 31 | December 31 | December 31 | December 31 | |||||||||||||||||||
| Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
|
Horizon Bancorp
|
100.00 | 99.60 | 93.10 | 45.40 | 58.90 | 96.60 | ||||||||||||||||||
|
Indiana Banks
|
100.00 | 110.10 | 80.80 | 84.40 | 54.80 | 64.40 | ||||||||||||||||||
|
Michigan Banks
|
100.00 | 100.70 | 53.20 | 24.70 | 14.50 | 14.00 | ||||||||||||||||||
The other information regarding Horizon’s common stock is included under the caption
“Horizon’s Common Stock and Related Stockholders’ Matters” in Item 8 below, which is incorporated
by reference.
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.
33
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Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Overview
Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan
City, Indiana. Horizon provides a broad range of banking services in Northwestern Indiana and
Southwestern Michigan through its bank subsidiary. Horizon operates as a single segment, which is
commercial banking. Horizon’s Common Stock is traded on the Nasdaq Global Market under the symbol
HBNC. The Bank was chartered as a national banking association in 1873 and has operated
continuously since that time. The Bank is a full-service commercial bank offering commercial and
retail banking services, corporate and individual trust and agency services, and other services
incident to banking.
Horizon continues to operate in a challenging economic environment. Within the Company’s primary
market areas of Northwest Indiana and Southwest Michigan, unemployment rates increased during 2009
and have remained at high levels during 2010. This rise in unemployment has been driven by factors
including slowdowns in the steel and recreational vehicle industries as well as a continued
slowdown in the housing industry. The increase in the Company’s non-performing loans over the past
year can be attributed to the continued slow economy and continued high local unemployment causing
lower business revenues and increased bankruptcies. Despite these economic factors, Horizon
continued to post positive results for 2010.
Following are some highlights of Horizons financial performance during 2010:
| • | Horizon’s 2010 results represent the Company’s eleventh consecutive year of record earnings. | ||
| • | Horizon’s net income for the twelve months ended December 31, 2010, was $10.5 million or $2.71 diluted earnings per share compared to $9.1 million or $2.37 diluted earnings per share for the prior year. | ||
| • | The net interest margin increased to 4.01% for the three months ending December 31, 2010, primarily as a result of the decrease in the rate paid on interest bearing liabilities during the quarter. | ||
| • | The net interest margin for 2010 was 3.80%, an increase over the margin of 3.66% during 2009. | ||
| • | The purchase and assumption of American Trust & Savings Bank in Whiting, Indiana closed on May 28, 2010 adding $107.8 million in purchased assets and $110.3 million of assumed liabilities. | ||
| • | The expensed acquisition costs for American Trust & Savings Bank were approximately $664,000 during 2010. | ||
| • | Horizon’s residential mortgage loan activity during 2010 provided $7.5 million of income from the gain on sale of mortgage loans. | ||
| • | Horizon’s provision for loan losses decreased $2.0 million during 2010 compared to 2009, however the ratio of allowance for loan losses to total loans increased to 2.11% from 1.80% during the same period. | ||
| • | Horizon’s net loans charged off decreased during 2010 to $8.5 million compared to $9.0 million during 2009. | ||
| • | Horizon’s non-performing loans increased by $4.3 million and Other Real Estate Owned increased $900,000 during 2010. | ||
| • | Horizon’s 30 to 89 day loan delinquencies decreased to 0.66% of total loans at December 31, 2010 compared to 1.09% of total loans at December 31, 2009. | ||
| • | Horizon’s non-performing loans to total loans ratio as of December 31, 2010 was 2.37%, which compares favorably to National and State of Indiana peer averages 1 as of December 31, 2010 of 4.77% and 2.55%, the most recent data available. | ||
| • | On November 10, 2010, the Company completed the redemption process to reduce the Treasury’s preferred stock investment by $6.25 million, which represents a 25% reduction. | ||
| • | Horizon’s capital ratios continue to be above the regulatory standards for well-capitalized banks. |
| 1 | National peer group: Consists of all insured commercial banks having assets between $1 Billion and $10 Billion as reported by the Uniform Bank Performance Report as of September 30, 2010. Indiana peer group: Consists of 17 publicly traded banks all headquartered in the State of Indiana as reported by the Uniform Bank Performance Reports as of December 31, 2010. |
34
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of this Annual Report on Form
10-K for 2010 contain a summary of the Company’s significant accounting policies. Certain of these
policies are important to the portrayal of the Company’s financial condition, since they require
management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain. Management has
identified the allowance for loan losses, intangible assets and hedge accounting as critical
accounting policies.
Allowance for Loan Losses
An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the
loan portfolio. The determination of the allowance for loan losses is a critical accounting policy
that involves management’s ongoing quarterly assessments of the probable incurred losses inherent
in the loan portfolio. The identification of loans that have probable incurred losses is
subjective; therefore, a general reserve is maintained to cover all probable losses within the
entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and
address asset quality problems in an adequate and timely manner. Each quarter, various factors
affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an
individual basis for loss potential. Other loans are reviewed as a group based upon previous
trends of loss experience. Horizon also reviews the current and anticipated economic conditions of
its lending market as well as transaction risk to determine the effect they may have on the loss
experience of the loan portfolio.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a
higher degree of judgment than most other significant accounting policies. FASB ASC 350-10
establishes standards for the amortization of acquired intangible assets and impairment assessment
of goodwill. At December 31, 2010, Horizon had core deposit intangibles of $2.7 million subject to
amortization and $5.9 million of goodwill, which is not subject to amortization. Goodwill arising
from business combinations represents the value attributable to unidentifiable intangible assets in
the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry
and that value is dependent upon the ability of Horizon to provide quality, cost effective banking
services in a competitive marketplace. The goodwill value is supported by revenue that is in part
driven by the volume of business transacted. A decrease in earnings resulting from a decline in
the customer base or the inability to deliver cost effective services over sustained periods can
lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC
350-10 requires 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, 2010 was $26.60 per share compared to a book value of $28.68 per common share.
Horizon reported record earnings for the eleventh consecutive year in 2010 and believes the below
book market price relates to an overall decline in the financial industry sector and is not
specific to Horizon.
The financial markets are currently reflecting significantly lower valuations for the stocks of
financial institutions, when compared to historic valuation metrics, largely driven by the
constriction in available credit and losses suffered related to residential mortgage markets. The
Company’s stock activity, as well as the price, has been affected by the economic conditions
affecting the banking industry. Management believes this downturn has impacted the Company’s stock
and has concluded that the recent stock price is not indicative or reflective of fair value (per
ASC Topic 820 Fair Value).
Horizon has concluded that, based on its own internal evaluation the recorded value of goodwill is
not impaired.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or
through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights
are amortized into non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing assets are evaluated
regularly for impairment based upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying servicing rights by predominant characteristics, such as
interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages.
Fair value is determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions. When the book value
of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each
individual
35
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
stratum is carried at the lower of its amortized book value or fair value. In periods
of falling market interest rates, accelerated loan prepayment can adversely affect the fair value
of these mortgage-servicing rights relative to their book value. In the event that the fair value
of these assets was to increase in the future, Horizon can recognize the increased fair value to
the extent of the impairment allowance but cannot recognize an asset in excess of its amortized
book value. Future changes in management’s assessment of the impairment of these servicing assets,
as a result of changes in observable market data relating to market interest rates, loan prepayment
speeds, and other factors, could impact Horizon’s financial condition and results of operations
either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur,
there is a corresponding increase in prepayments as customers refinance existing mortgages under
more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows
associated with servicing that loan are terminated, resulting in a reduction of the fair value of
the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not
react as anticipated by the prepayment model (i.e., the historical data observed in the model does
not correspond to actual market activity), it is possible that the prepayment model could fail to
accurately predict mortgage prepayments and could result in significant earnings volatility. To
estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon
statistically derived data linked to certain key principal indicators involving historical borrower
prepayment activity associated with mortgage loans in the secondary market, current market interest
rates and other factors, including Horizon’s own historical prepayment experience. For purposes of
model valuation, estimates are made for each product type within the mortgage servicing rights
portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to
independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time,
interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate
fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the
consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported
in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of
the derivative and whether the instrument qualifies for hedge accounting. The key criterion for
the hedge accounting is that the hedged relationship must be highly effective in achieving
offsetting changes in those cash flows that are attributable to the hedged risk, both at inception
of the hedge and on an ongoing basis.
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
36
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
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.
Analysis of Financial Condition
Horizon’s total assets were $1.4 billion as of December 31, 2010, an increase of $13.9 million from
December 31, 2009.
Cash and Cash Equivalents
Due to the economic environment the financial institution industry was experiencing at the
beginning of 2009, management determined it would be prudent to maintain higher liquidity levels.
During that same time the Company’s mortgage warehouse business line was experiencing significant
growth due to the increase in mortgage loan refinancing activity, and this also created a need for
additional liquidity. Management put into place several successful strategies during the first
quarter of 2009 to generate the additional liquidity. As a result, the Company maintained excess
cash and cash
equivalents at the end of the first quarter and throughout most of the second quarter of 2009. A
significant portion of that additional liquidity was generated from municipal money market
deposits. This funding was designed to match the growth of assets in the mortgage warehouse
business line and provide additional liquidity without utilizing asset based collateral borrowings
or federal fund lines. During the second and third quarters the additional funding from the
municipal money market accounts was moved out of the Bank and cash and cash equivalents and the
municipal money market accounts were back to more historic levels but as we moved through the
fourth quarter a significant portion of those additional funds were brought back into the Bank.
During 2010 cash and cash equivalents were maintained at more historic operating levels as
management did not increase levels to maintain additional liquidity. Although the Bank does not
anticipate a need to maintain the level of excess liquidity as it did in the first half of the
2009, it will continue to provide deposit services to our local municipalities who require a safe
and secure institution to maintain their funds.
Investment Securities
Investment securities totaled $391.9 million at December 31, 2010, and consisted of Treasury and
federal agency securities of $25.3 million (6.4%); state and municipal securities of $141.1 million
($131.5 million are available for sale and $9.6 million are held to maturity) (36.0%); federal
agency mortgage-backed pools of $117.9 million and federal agency collateralized mortgage
obligations of $107.2 million (57.4%); and corporate securities of $549,000 (0.1%).
As indicated above, 57.4% of the investment portfolio consists of mortgage-backed securities and
collateralized mortgage obligations. Approximately 1.4% of the portfolio or $5.3 million are
private label collateralized mortgage obligations, the remainder are issued by agencies of the
Federal Government. The private label securities generally have loan to value ratios of
approximately 50% and management feels these securities are not impaired. 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, 2010, the mortgage-backed securities
and collateralized mortgage obligations in the investment portfolio had an average life of 2.2
years. Securities that have interest rates above current market rates are purchased at a premium.
These securities may experience a significant increase in prepayments when lower market interest
rates create an incentive for the borrower to refinance the underlying mortgage as occurred during
2009 and 2010. This may result in a decrease of current income, however, this risk is mitigated by
a shorter average life.
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 permanent
deterioration in market value.
At December 31, 2010, 97.6% and at December 31, 2009, 96.6% 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,
37
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
net of tax, directly to stockholders’
equity. Net appreciation on these securities totaled $5.0 million, which resulted in a balance of
$3.2 million, net of tax, included in stockholders’ equity at December 31, 2010. This compared to
a $5.4 million, net of tax, included in stockholders’ equity at December 31, 2009.
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. Level 1 securities include Treasury securities and corporate notes.
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 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
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”.
Horizon had four private label CMO’s at December 31, 2010, with an amortized cost of $5.2 million
and carried at a market value of $5.3 million. The gross unrealized gain on these investments at
December 31, 2010 was approximately $125,000. Management monitors these investments periodically
for other than temporary impairment by obtaining and reviewing the underlying collateral details
and has concluded at December 31, 2010 this unrealized loss is temporary and that the Company has
the intent and ability to hold these investments to maturity.
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, 2010 Horizon had investments in the common stock of
the Federal Reserve and Federal Home Loan Banks totaling $13.7 million and at December 31, 2009
investments totaled $13.2 million.
At December 31, 2010, Horizon does not maintain a trading account.
For more information about securities, see Note 3 (Investment Securities) to the consolidated
financial statements.
38
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Loans
Total loans, including loans held for sale and net of deferred fees/costs, the principal earning
asset of the Bank, were $901.7 million at December 31, 2010. The current level of loans is an
increase of 1.1% from the December 31, 2009, level of $892.0 million. The table below provides
comparative detail on the loan categories.
| December 31 | December 31 | Dollar | Percent | |||||||||||||
| 2010 | 2009 | Change | Change | |||||||||||||
|
Commercial
|
||||||||||||||||
|
Working capital and equipment
|
$ | 151,414 | $ | 167,149 | $ | (15,735 | ) | -9.4 | % | |||||||
|
Real estate, including agriculture
|
167,785 | 135,639 | 32,146 | 23.7 | % | |||||||||||
|
Tax exempt
|
2,925 | 3,247 | (322 | ) | -9.9 | % | ||||||||||
|
Other
|
7,894 | 8,482 | (588 | ) | -6.9 | % | ||||||||||
|
Total
|
330,018 | 314,517 | 15,501 | 4.9 | % | |||||||||||
|
|
||||||||||||||||
|
Real estate
|
||||||||||||||||
|
1—4 family (including loans held
for sale)
|
176,311 | 134,076 | 42,235 | 31.5 | % | |||||||||||
|
Other
|
4,957 | 5,519 | (562 | ) | -10.2 | % | ||||||||||
|
Total
|
181,268 | 139,595 | 41,673 | 29.9 | % | |||||||||||
|
|
||||||||||||||||
|
Consumer
|
||||||||||||||||
|
Auto
|
136,014 | 146,270 | (10,256 | ) | -7.0 | % | ||||||||||
|
Recreation
|
6,086 | 5,321 | 765 | 14.4 | % | |||||||||||
|
Real estate/home improvement
|
29,184 | 32,009 | (2,825 | ) | -8.8 | % | ||||||||||
|
Home equity
|
90,580 | 83,412 | 7,168 | 8.6 | % | |||||||||||
|
Unsecured
|
3,091 | 2,222 | 869 | 39.1 | % | |||||||||||
|
Other
|
1,726 | 1,976 | (250 | ) | -12.7 | % | ||||||||||
|
Total
|
266,681 | 271,210 | (4,529 | ) | -1.7 | % | ||||||||||
|
|
||||||||||||||||
|
Mortgage warehouse
|
||||||||||||||||
|
Prime
|
123,743 | 166,698 | (42,955 | ) | -25.8 | % | ||||||||||
|
Sub-prime
|
— | — | — | 0.0 | % | |||||||||||
|
Total
|
123,743 | 166,698 | (42,955 | ) | -25.8 | % | ||||||||||
|
Total loans
|
901,710 | 892,020 | 9,690 | 1.1 | % | |||||||||||
|
Allowance for loan losses
|
(19,064 | ) | (16,015 | ) | (3,049 | ) | ||||||||||
|
Loans and loans held for sale, net
|
$ | 882,646 | $ | 876,005 | $ | 6,641 | ||||||||||
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.
Real Estate Loans
Real estate loans totaled $181.3 million or 20.1% of total loans as of December 31, 2010, compared
to $139.6 million or 15.6% of total loans as of December 31, 2009. 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 2010 was primarily related to the purchase of $36.3 million of real estate loans in the
American Trust & Savings transaction.
In addition to the customary real estate loans described above, the Bank also has outstanding on
December 31, 2010, $90.6 million in home equity lines of credit compared to $83.4 million at
December 31, 2009. Credit lines normally limit the loan
39
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
to collateral value to no more than 89%. These loans are classified as consumer loans in the table
above and in Note 4 of the consolidated financial statements.
Residential real estate lending is a highly competitive business. As of December 31, 2010, the
real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but
could generally be categorized as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Amount | Portfolio | Yield | Amount | Portfolio | Yield | |||||||||||||||||||
|
Fixed rate
|
||||||||||||||||||||||||
|
Monthly payment
|
$ | 64,599 | 39.8 | % | 5.48 | % | $ | 24,237 | 18.1 | % | 5.94 | % | ||||||||||||
|
Biweekly payment
|
920 | 0.6 | % | 6.29 | % | 1,579 | 1.2 | % | 6.71 | % | ||||||||||||||
|
Adjustable rate
|
||||||||||||||||||||||||
|
Monthly payment
|
96,916 | 59.7 | % | 5.29 | % | 108,072 | 80.7 | % | 5.68 | % | ||||||||||||||
|
Biweekly payment
|
— | 0.0 | % | 0.00 | % | 4 | 0.0 | % | 3.75 | % | ||||||||||||||
|
Sub total
|
162,435 | 100.0 | % | 5.37 | % | 133,892 | 100.0 | % | 5.74 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Loans held for sale
|
18,833 | 5,703 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total real estate loans
|
$ | 181,268 | $ | 139,595 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
The increase in fixed rate loans during 2010 was primarily due to the purchase of fixed rate
mortgage loans from American Trust & Savings Bank. During 2010 and 2009, approximately $281.7
million and $335.9 million of residential mortgages were sold into the secondary market. In
addition to the real estate loan portfolio, the Bank sells real estate loans and retains the
servicing rights. Loans serviced for others are not included in the consolidated balance sheets.
The unpaid principal balances of loans serviced for others totaled approximately $463.5 million and
$313.3 million at December 31, 2010 and 2009.
The Bank began capitalizing mortgage servicing rights during 2000 and the aggregate fair value of
capitalized mortgage servicing rights at December 31, 2010, totaled approximately $3.7 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 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Mortgage servicing rights
|
||||||||||||
|
Balances, January 1
|
$ | 3,010 | $ | 732 | $ | 276 | ||||||
|
Servicing rights capitalized
|
2,000 | 2,807 | 634 | |||||||||
|
Amortization of servicing
rights
|
(835 | ) | (529 | ) | (178 | ) | ||||||
|
|
4,175 | 3,010 | 732 | |||||||||
|
Impairment allowance
|
(803 | ) | (139 | ) | (4 | ) | ||||||
|
Balances, December 31
|
$ | 3,372 | $ | 2,871 | $ | 728 | ||||||
Commercial Loans
Commercial loans totaled $330.0 million, or 36.6% of total loans as of December 31, 2010,
compared to $314.5 million, or 35.3% as of December 31, 2009.
40
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Commercial loans consisted of the following types of loans at December 31:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Number | Amount | Portfolio | Number | Amount | Portfolio | |||||||||||||||||||
|
SBA guaranteed loans
|
93 | $ | 14,909 | 4.5 | % | 53 | $ | 7,915 | 2.5 | % | ||||||||||||||
|
Municipal government
|
1 | 918 | 0.3 | % | 1 | 995 | 0.3 | % | ||||||||||||||||
|
Lines of credit
|
355 | 41,607 | 12.6 | % | 389 | 53,587 | 17.0 | % | ||||||||||||||||
|
Real estate and equipment term loans
|
944 | 272,583 | 82.6 | % | 805 | 252,019 | 80.2 | % | ||||||||||||||||
|
Total
|
1,393 | $ | 330,017 | 100.0 | % | 1,248 | $ | 314,516 | 100.0 | % | ||||||||||||||
Fixed rate term loans with a book value of $48.0 million and a fair value of $50.1 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 2009 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, 2010 the commercial loan portfolio had $68.6 million of adjustable rate loans that
had interest rate floors in the terms of the note. Of the commercial loans with interest rate
floors, $58.9 million where at their floor at December 31, 2010.
Consumer Loans
Consumer loans totaled $266.7 million, or 29.6% of total loans as of December 31, 2010, compared to
$271.2 million, or 30.4% as of December 31, 2009. The total consumer loan portfolio decreased 1.7%
in 2010. The decline occurred primarily in the indirect automobile and direct installment loan
segments. The slow down in the automobile market has contributed to the drop in loans, as existing
loans paid off at a faster rate than new loans were booked. Direct installment loan declines were
the result of a slow economy as there was lower consumer loan demand.
Mortgage Warehouse Loans
Horizon’s mortgage warehousing business line has specific mortgage companies as customers of
Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a
secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company.
Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by
the mortgage company. In addition, Horizon takes possession of each original note and forwards
such note to the end investor once the mortgage company has sold the loan. At the time a loan is
transferred to the secondary market, the mortgage company repurchases the loan under its option
within the agreement. Due to the repurchase feature contained in the agreement, the transaction
does not qualify as a sale and therefore is accounted for as a secured borrowing with pledge of
collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to
the end investor by the mortgage company the proceeds from the sale of the loan are received by
Horizon and used to payoff the loan balance with Horizon along with any accrued interest and any
related fees. The remaining balance from the sale is forwarded to the mortgage company. These
individual loans typically are sold by the mortgage company within 30 days and are seldom held more
than 90 days. Interest income is accrued during this period and collected at the time each loan is
sold. Fee income for each loan sold is collected when the loan is sold and no costs are deferred
due to the term between each loan funding and related payoff is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase
from Horizon their outstanding loan balance on an individual mortgage and regain possession of the
original note. Horizon also has the option to request that the mortgage company repurchase an
individual mortgage. Should this occur, Horizon would return the original note and reassign the
assignment of the mortgage to the mortgage company. Also, in the event that the end investor would
not be able to honor the sales commitment and the mortgage company would not be able to repurchase
its loan on an individual mortgage, Horizon would be able to exercise its rights under the
agreement.
41
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Allowance and Provision for Loan Losses/Critical Accounting Policy
At December 31, 2010, the allowance for loan losses was $19.1 million, or 2.11% of total loans
outstanding, compared to $16.0 million, or 1.80% at December 31, 2009. During 2010, the expense
for provision for loan losses totaled $11.6 million compared to $13.6 million in 2009.
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. For the year 2010, the provision of $11.6 million is a 15.1% decrease from the prior
year. Loan charge-offs continue to require provisions for loan losses during the year but appeared
to be stabilizing as the amount of charge-offs have trended down during 2010 compared to 2009.
However, as non-performing loans increased, specific reserves were identified for these loans, and
the use of higher historical charge-off ratios in the allowance for loan loss calculation, required
additional provision expense for loan losses.
Despite the increased allowance, no assurance can be given that Horizon will not, in any particular
period, sustain loan losses that are significant in relation to the amount reserved, or that
subsequent evaluations of the loan portfolio, in light of factors then prevailing, including
economic conditions and management’s ongoing quarterly assessments of the portfolio, will not
require increases in the allowance for loan losses. Horizon considers the allowance for loan
losses to be appropriate to cover losses inherent in the loan portfolio as of December 31, 2010.
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 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Non-performing loans
|
$ | 21,428 | $ | 17,145 | $ | 7,863 | ||||||
| Non- | Percent | Specific | Percent of | |||||||||||||||||
| Loan | Performing | of | Reserves on Non - | Non-performing | ||||||||||||||||
| December 31, 2010 | Balance | Loans | Loans | Performing Loans | Loans | |||||||||||||||
|
Owner occupied real estate
|
$ | 125,909 | $ | 1,042 | 0.83 | % | $ | 385 | 36.95 | % | ||||||||||
|
Non owner occupied real estate
|
137,073 | 6,329 | 4.62 | % | 665 | 10.51 | % | |||||||||||||
|
Residential development
|
8,694 | 266 | 3.06 | % | 142 | 53.38 | % | |||||||||||||
|
Commercial and industrial
|
58,342 | 445 | 0.76 | % | 265 | 59.55 | % | |||||||||||||
|
Total commercial
|
330,018 | 8,082 | 2.45 | % | 1,457 | 18.03 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Residential mortgage (1)
|
173,800 | 9,326 | 5.37 | % | 969 | 10.39 | % | |||||||||||||
|
Residential construction
|
7,468 | — | 0.00 | % | — | 0.00 | % | |||||||||||||
|
Mortgage warehouse
|
123,743 | — | 0.00 | % | — | 0.00 | % | |||||||||||||
|
Total real estate
|
305,011 | 9,326 | 3.06 | % | 969 | 10.39 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Direct installment
|
25,058 | 287 | 1.15 | % | 976 | 340.07 | % | |||||||||||||
|
Indirect installment
|
128,129 | 1,431 | 1.12 | % | — | 0.00 | % | |||||||||||||
|
Home equity
|
113,494 | 2,302 | 2.03 | % | — | 0.00 | % | |||||||||||||
|
Total consumer
|
266,681 | 4,020 | 1.51 | % | 976 | 24.28 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Total loans
|
901,710 | 21,428 | 2.38 | % | 3,402 | 15.88 | % | |||||||||||||
|
Allowance for loan losses
|
(19,064 | ) | ||||||||||||||||||
|
Net loans
|
$ | 882,646 | $ | 21,428 | 2.43 | % | $ | 3,402 | ||||||||||||
| (1) | Residential mortgage total includes Held for Sale mortgage loans |
42
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-performing loans total 112.4%, 107.1% and 68.9% of the allowance for loan losses at
December 31, 2010, 2009 and 2008, respectively. Non-performing loans at December 31, 2010 totaled
$21.4 million which was 2.38% of total loans. This is an increase from a balance of $17.1 million
on December 31, 2009, which was 1.92% of total loans. Horizon’s non-performing loan statistics,
while having increased from the prior year, still compare favorably to National and State of
Indiana peer bank averages
1
of 4.77% and 2.55% of total loans as of December 31, 2010.
Non-performing commercial loans decreased by $1.1 million from December 31, 2009. This decrease
came from the commercial real estate, residential development, and commercial and industrial
segments of the portfolio. Non-owner occupied real estate non-performing increased $4.6 million
primarily due to a $4.5 million loan secured by a hotel that was placed on non-accrual in 2010.
This loan is current and making interest only payments which are being applied to the principal
balance and the real estate collateral is for sale. Economic conditions are the primary reason for
causing distressed demand for real estate and durable goods, and many real estate developers and
small businesses are experiencing declines in revenue and profits.
The increase in non-performing loans over the past year is also due to an increase in real estate
and consumer installment borrowers under Chapter 13 bankruptcy repayment plans. As of December 31,
2010 non-performing loans include $1.8 million of real estate loans and $2.3 million of consumer
loans that were in bankruptcy. The majority of the borrowers under Chapter 13 repayment plans are
paying as agreed, but these loans remain on non-accrual status until six consecutive payments are
made as agreed under the plan. Because of the time it takes for repayment plans to be approved and
the six consecutive payments to be made, the level of non-performing consumer installment loans
have increased as the level of charge-offs in the consumer portfolio has decreased. The Company
also saw an increase in troubled debt restructuring (“TDR’s”) during 2010. The balance of TDR’s as
of December 31, 2010 that were accruing interest was $4.1 million, primarily in real estate loans,
and $278,000 on non-accrual. The increase in the Company’s non-performing loans over the past year
can be attributed to the slower economy and continued high local unemployment causing lower
business revenues and increased consumer bankruptcies.
Non-accrual loans totaled $17.0 million on December 31, 2010 up from $11.9 million on December 31,
2009. Non-accrual loans to hotel owners totaled $4.5 million, to home builders and land developers
$1.2 million, to restaurant operators $1.0 million, and to other commercial loans totaled
approximately $800,000. Mortgage loans on non-accrual totaled $5.7 million at December 31, 2010.
Consumer loans on non-accrual increased to $3.7 million primarily due to an increase in the number
of consumer bankruptcy filings.
Loans 90 days delinquent but still accruing interest totaled $358,000 on December 31, 2010, down
from $1.8 million on December 31, 2009. Horizon’s policy is to place loans over 90 days delinquent
on non-accrual unless they are in the process of collection and a full recovery is expected.
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 6
of the audited financial statements 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
43
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
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 are as follows:
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Other real estate owned
|
$ | 2,664 | $ | 1,730 | $ | 2,772 | ||||||
OREO totaled $2.7 million on December 31, 2010 up from $1.7 million on December 31, 2009. At
December 31, 2010, OREO was comprised of 17 properties. Of these, seven totaling $2.0 million were
commercial and ten totaling $684,000 were residential real estate. There was no repossessed
personal property on December 31, 2010. Horizon currently has $1.7 million of OREO under contract
to sell with closing dates scheduled within the next 90 days.
No mortgage warehouse loans were non-performing or OREO as of December 31, 2010, 2009 or 2008.
Deferred Tax Asset
Horizon had a deferred tax asset at December 31, 2010 and 2009 totaling $2.0 million and $701,000.
The following table shows the major components of deferred tax:
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Allowance for loan losses
|
$ | 6,946 | $ | 5,849 | ||||
|
Director and employee benefits
|
1,371 | 1,057 | ||||||
|
Other
|
102 | 32 | ||||||
|
Total assets
|
8,419 | 6,938 | ||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Depreciation
|
(1,147 | ) | (1,241 | ) | ||||
|
Difference in expense recognition
|
(51 | ) | (148 | ) | ||||
|
Federal Home Loan Bank stock dividends
|
(298 | ) | (298 | ) | ||||
|
Difference in basis of intangible assets
|
(1,682 | ) | (1,547 | ) | ||||
|
FHLB Penalty
|
(1,417 | ) | — | |||||
|
Unrealized gain on securities available for sale
|
(1,746 | ) | (2,930 | ) | ||||
|
Other
|
(80 | ) | (73 | ) | ||||
|
Total liabilities
|
(6,421 | ) | (6,237 | ) | ||||
|
Net deferred tax asset
|
$ | 1,998 | $ | 701 | ||||
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 superior to those required for
deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were
$985.5 million at December 31, 2010, compared to $951.7 million at December 31,
44
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
2009, or an increase of 3.6%. Average deposits and rates by category for the three years ended
December 31 are as follows:
| Average Balance Outstanding for the | Average Rate Paid for the | |||||||||||||||||||||||
| Year Ending December 31 | Year Ending December 31 | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Noninterest-bearing demand deposits
|
$ | 97,665 | $ | 84,209 | $ | 77,600 | ||||||||||||||||||
|
Interest-bearing demand deposits
|
359,411 | 261,411 | 234,526 | 0.22 | % | 0.57 | % | 1.36 | % | |||||||||||||||
|
Savings deposits
|
61,175 | 35,828 | 31,182 | 0.23 | % | 0.18 | % | 0.29 | % | |||||||||||||||
|
Money market
|
78,561 | 121,983 | 95,483 | 0.16 | % | 0.83 | % | 1.56 | % | |||||||||||||||
|
Time deposits
|
372,379 | 381,033 | 372,677 | 2.60 | % | 3.21 | % | 3.96 | % | |||||||||||||||
|
Total deposits
|
$ | 969,191 | $ | 884,464 | $ | 811,468 | ||||||||||||||||||
The $84.7 million increase in average deposits during 2010 was primarily from the $97.7
million in deposits assumed from American Trust & Savings Bank transaction. Horizon continually
revises and 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. These product
changes caused the changes in the average balances and rates paid as displayed in the table above.
Certificates of deposit of $100,000 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, 2010:
|
Due in three months or less
|
$ | 18,417 | ||
|
Due after three months through six months
|
22,150 | |||
|
Due after six months through one year
|
48,887 | |||
|
Due after one year
|
116,676 | |||
|
|
||||
|
Total
|
$ | 206,130 | ||
|
|
||||
Interest expense on time certificates of $100,000 or more was approximately $4.5 million, $6.3
million, and $3.9 million for 2010, 2009, and 2008.
Off-Balance Sheet Arrangements
As of December 31, 2010, Horizon does 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 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.
45
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Contractual Obligations
The following tables summarize Horizon’s contractual obligations and other commitments to make
payment as of December 31, 2010:
| Within | One to | Three to | After Five | |||||||||||||||||
| Total | One Year | Three Years | Five Years | Years | ||||||||||||||||
|
Deposits
|
$ | 368,939 | $ | 183,851 | $ | 106,100 | $ | 33,773 | $ | 45,215 | ||||||||||
|
Borrowings
(1)
|
260,741 | 78,255 | 26,024 | 41,708 | 114,754 | |||||||||||||||
|
Subordinated debentures
(2)
|
30,584 | — | — | — | 30,584 | |||||||||||||||
| (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 11 in Horizon’s Consolidated Financial Statements. | |
| (2) | Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisition of Alliance. See Note 12 in Horizon’s Consolidated Financial Statements. |
| Expiration by Period | ||||||||
| Greater | ||||||||
| Within One | Than | |||||||
| Year | One Year | |||||||
|
Letters of credit
|
$ | 894 | $ | 226 | ||||
|
Unfunded loan commitments
|
77,908 | 174,520 | ||||||
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios for “well
capitalized” banks at December 31, 2010. Stockholders’ equity totaled $112.3 million as of
December 31, 2010, compared to $114.6 million as of December 31, 2009. At year-end 2010, the ratio
of stockholders’ equity to assets was 8.01% compared to 8.26% for 2009. Tangible equity to
tangible assets was 7.44% at December 31, 2010 compared to 7.78% at December 31, 2009. Book value
per common share at December 31, 2010 increased to $28.68 compared to $27.67 at December 31, 2009.
Horizon’s capital decreased during 2010 as a result of a decrease in other comprehensive income,
dividends declared, and the redemption of preferred stock, offset by earnings and exercise of stock
options net of tax.
In December of 2008, Horizon received an investment of $25 million through participation in the
U.S. Department of Treasury’s (Treasury) Capital Purchase Program. Under the program, the Treasury
acquired 25,000 Series A shares of Horizon’s Fixed Rate Cumulative Perpetual Preferred Stock that
will pay a 5% per annum dividend for the first five years of the investment (which will total
$1,250,000 a year) and 9% per annum thereafter (which will total $2,250,000 a year) unless Horizon
redeems the shares. The preferred shares qualify as Tier I capital and are callable by Horizon
after three years. As part of its investment, the Treasury also received a warrant to purchase
212,104 shares of common stock of Horizon, with an exercise price of $17.68 per share. The warrant
is expected to give the Treasury the opportunity to benefit from an increase in the common stock
price of the Company.
On November 3, 2010, the Company received approval to redeem 25%, or $6.25 million, of the
Treasury’s original $25.0 million preferred stock investment in the Company from the Capital
Purchase Program, which is a program of TARP. On November 10, 2010, the Company completed the
redemption process reducing the Treasury’s preferred stock investment in the Company to $18.75
million. This repurchase will result in annual savings of $312,500 or $0.10 per share, due to the
elimination of the associated preferred dividends. Horizon has also applied for a $19 million loan
under the recently implemented Small Business Loan Fund program (the “SBLF”), and if its
application is approved, Horizon plans to repurchase the remaining $18.5 million in Series A
Preferred Shares from Treasury with those proceeds. Enacted into law as part of the Small Business
Jobs Act of 2010, the SBLF is a $30 billion fund that encourages lending to small businesses by
providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The
SBLF program provides an option for community banks to refinance preferred stock issued to Treasury
through the Capital Purchase Program, and the SBLF program does not impose many of the restrictions
that Horizon is currently subject to under TARP. There can
46
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
be no assurance, however, that Horizon will receive the SBLF funds, and if Horizon does not receive
those funds, its plan is to repurchase the remaining preferred shares over the next three years
from the Company’s earnings.
Horizon declared dividends in the amount of $.68 per share in 2010, $.68 per share in 2009, and
$.66 per share in 2008. The dividend payout ratio (dividends as a percent of net income) was 25.1%
for 2010, 28.7% for 2009, and 24.0% for 2008. For additional information regarding dividend
conditions, see Note 1 of the Notes to the Consolidated Financial Statements.
In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory
business trust. Trust II issued $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% and
mature on October 21, 2034, and are non-callable for five years from the issue date. After that
period, the 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 are being
amortized to the 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 issued $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% and
mature on January 30, 2037, and are non-callable for five years from the issue date. After that
period, the 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 proceeds of this issue were used to redeem
the securities issued by Trust I on March 26, 2007.
The Company assumed additional debentures as the result of the acquisition of Alliance 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
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%, mature in June 2034, and are non-callable for five years from the issue date. After that
period, the 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 $3.6 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%,
mature in March 2034, and are non-callable for five years. After that period, the securities may
be called at any quarterly interest payment date at par.
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.
47
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Results of Operations
Net Income
Net Income
Consolidated net income was $10.5 million or $2.71 per diluted share in 2010, $9.1 million or $2.37
per diluted share in 2009, and $9.0 million or $2.75 per share in 2008. Diluted earnings per share
were reduced by $0.43 for the twelve months ending December 31, 2010 and 2009 resulting from the
preferred stock dividends and the accretion of the discount on the preferred stock. The preferred
stock was issued late in the fourth quarter 2008 and therefore did not significantly impact diluted
earnings per share for the twelve month periods ending December 31, 2008.
Net Interest Income
The largest component of net income is net interest income. Net interest income is the difference
between interest income, principally from loans and investment securities, and interest expense,
principally on deposits and borrowings. Changes in the net interest income are the result of
changes in volume and the net interest spread which affects the net interest margin. Volume refers
to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net
interest spread refers to the difference between the average yield on interest-earning assets and
the average cost of interest-bearing liabilities. Net interest margin refers to net interest
income divided by average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The reduction in interest rates during 2010 and 2009 has influenced the cost of the Company’s
interest bearing liabilities more significantly than the reduction in yields received on the
Company’s interest earning assets, resulting in an increase of the net interest margin during 2010
and 2009. Management believes that the current level of interest rates is driven by external
factors and therefore impacts the results of the Company’s net interest margin. Management does
not expect a significant rise in interest rates in the short term, but an increase in rates is
expected at some time in the future due to the current historically low interest rate environment.
Net interest income during 2010 was $47.6 million, an increase of $2.8 million or 6.3% over the
$44.8 million earned in 2009. Yields on the Company’s interest-earning assets decreased by 45
basis points to 5.40% during 2010 from 5.85% in 2009. Interest income decreased $4.2 million to
$68.5 million for 2010 from $72.7 million in 2009. This decrease was due to the lower yield on
interest earning assets partially offset by the increased volume in interest earning assets.
Rates paid on interest-bearing liabilities decreased by 64 basis points during the same period due
to the lower interest rate environment. Interest expense decreased $7.0 million from $27.9 million
for 2009 to $20.9 million in 2010. This decrease was due to the lower rates being paid on the
Company’s interest bearing liabilities but offset by the increased volume of interest bearing
liabilities. Due to a more significant decrease in the rates paid on the Company’s
interest-bearing liabilities compared to the decrease in the yield on the Company’s
interest-earning assets, offset with the growth of the Company’s interest earning assets and
interest bearing liabilities, the net interest margin increased 14 basis points from 3.66% for 2009
to 3.80% in 2010.
48
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
| Twelve Months Ended | Twelve Months Ended | Twelve Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
Federal funds sold
|
$ | 23,917 | $ | 53 | 0.22 | % | $ | 25,551 | $ | 56 | 0.22 | % | $ | 17,040 | $ | 443 | 2.60 | % | ||||||||||||||||||
|
Interest-earning deposits
|
8,684 | 17 | 0.20 | % | 7,170 | 16 | 0.22 | % | 6,430 | 148 | 2.30 | % | ||||||||||||||||||||||||
|
Investment securities — taxable
|
282,507 | 9,535 | 3.38 | % | 247,903 | 10,813 | 4.36 | % | 174,427 | 8,520 | 4.88 | % | ||||||||||||||||||||||||
|
Investment securities — non-taxable (1)
|
108,809 | 4,148 | 5.45 | % | 97,913 | 3,942 | 5.75 | % | 80,151 | 3,323 | 5.92 | % | ||||||||||||||||||||||||
|
Loans receivable (2)
|
878,181 | 54,738 | 6.24 | % | 892,431 | 57,836 | 6.49 | % | 848,279 | 57,801 | 6.82 | % | ||||||||||||||||||||||||
|
Total interest-earning assets (1)
|
1,302,098 | 68,491 | 5.40 | % | 1,270,968 | 72,663 | 5.85 | % | 1,126,327 | 70,235 | 6.37 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
15,341 | 15,344 | 17,397 | |||||||||||||||||||||||||||||||||
|
Allowance for loan losses
|
(17,058 | ) | (12,372 | ) | (9,930 | ) | ||||||||||||||||||||||||||||||
|
Other assets
|
93,671 | 77,215 | 69,769 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
$ | 1,394,052 | $ | 1,351,155 | $ | 1,203,563 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 871,526 | $ | 10,711 | 1.23 | % | $ | 800,255 | $ | 14,792 | 1.85 | % | $ | 733,868 | $ | 19,536 | 2.66 | % | ||||||||||||||||||
|
Borrowings
|
264,293 | 8,476 | 3.21 | % | 318,661 | 11,696 | 3.67 | % | 280,766 | 11,772 | 4.19 | % | ||||||||||||||||||||||||
|
Subordinated debentures
|
32,005 | 1,688 | 5.27 | % | 27,837 | 1,406 | 5.05 | % | 27,837 | 1,577 | 5.67 | % | ||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,167,824 | 20,875 | 1.79 | % | 1,146,753 | 27,894 | 2.43 | % | 1,042,471 | 32,885 | 3.15 | % | ||||||||||||||||||||||||
|
Noninterest-bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits
|
97,665 | 84,209 | 77,600 | |||||||||||||||||||||||||||||||||
|
Accrued
interest payable and other liabilities
|
10,466 | 9,215 | 7,001 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
118,097 | 110,978 | 76,491 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
$ | 1,394,052 | $ | 1,351,155 | $ | 1,203,563 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income/spread
|
$ | 47,616 | 3.61 | % | $ | 44,769 | 3.42 | % | $ | 37,350 | 3.21 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income as a percent
of average interest earning assets (1)
|
3.80 | % | 3.66 | % | 3.45 | % | ||||||||||||||||||||||||||||||
| (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, 2010. | |
| (2) | Yields are presented on a tax-equivalent basis. | |
| (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 $3.9 million, $4.2 million, and $3.5 million in 2010, 2009, and 2008. |
| 2010 - 2009 | 2009 - 2008 | |||||||||||||||||||||||
| 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
|
$ | (3 | ) | $ | (4 | ) | $ | 1 | $ | (387 | ) | $ | 150 | $ | (537 | ) | ||||||||
|
Interest-earning deposits
|
1 | 3 | (2 | ) | (132 | ) | 15 | (147 | ) | |||||||||||||||
|
Investment securities — taxable
|
(1,278 | ) | 1,379 | (2,657 | ) | 2,293 | 3,283 | (990 | ) | |||||||||||||||
|
Investment securities — non-taxable
|
206 | 604 | (398 | ) | 619 | 1,025 | (406 | ) | ||||||||||||||||
|
Loans receivable
|
(3,098 | ) | (914 | ) | (2,184 | ) | 35 | 2,936 | (2,901 | ) | ||||||||||||||
|
Total interest income
|
(4,172 | ) | 1,068 | (5,240 | ) | 2,428 | 7,409 | (4,981 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest Expense
|
||||||||||||||||||||||||
|
Interest-bearing deposits
|
(4,081 | ) | 1,225 | (5,306 | ) | (4,744 | ) | 1,644 | (6,388 | ) | ||||||||||||||
|
Borrowings
|
(3,220 | ) | (1,851 | ) | (1,369 | ) | (76 | ) | 1,486 | (1,562 | ) | |||||||||||||
|
Subordinated debentures
|
282 | 218 | 64 | (171 | ) | — | (171 | ) | ||||||||||||||||
|
Total interest expense
|
(7,019 | ) | (408 | ) | (6,611 | ) | (4,991 | ) | 3,130 | (8,121 | ) | |||||||||||||
|
Net interest income
|
$ | 2,847 | $ | 1,476 | $ | 1,371 | $ | 7,419 | $ | 4,279 | $ | 3,140 | ||||||||||||
Net interest income during 2009 was $44.8 million, an increase of $7.4 million or 19.8% over
the $37.4 million earned in 2008. Yields on the Company’s interest-earning assets decreased by 52
basis points to 5.85% during 2009 from 6.37% in
49
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
2008. Interest income increased $2.5 million from $70.2 million for 2008 to $72.7 million in
2009. This increase was due to the increased volume in interest earning assets partially offset by
the decrease in the yield on interest earning assets.
Rates paid on interest-bearing liabilities decreased by 72 basis points during the same period due
to the lower interest rate environment. Interest expense decreased $5.0 million from $32.9 million
for 2008 to $27.9 million in 2009. This decrease was due to the lower rates being paid on the
Company’s interest bearing liabilities but offset by the increased volume of interest bearing
liabilities. Due to a more significant decrease in the rates paid on the Company’s
interest-bearing liabilities compared to the decrease in the yield on the Company’s
interest-earning assets, offset with the growth of the Company’s interest earning assets and
interest bearing liabilities, the net interest margin increased 21 basis points from 3.45% for 2008
to 3.66% in 2009.
Changes in the mix of the loan portfolio averages are shown in the following table.
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Commercial
|
$ | 320,783 | $ | 313,623 | $ | 305,127 | ||||||
|
Real estate
|
163,597 | 147,765 | 182,963 | |||||||||
|
Mortgage warehouse
|
124,787 | 157,057 | 77,091 | |||||||||
|
Consumer
|
269,014 | 273,986 | 283,098 | |||||||||
|
Total average loans
|
$ | 878,181 | $ | 892,431 | $ | 848,279 | ||||||
Provision for Loan Losses
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly
reviewing the performance of its loan portfolios. During 2010 the provision for loan losses
totaled $11.6 million compared to $13.6 million in the prior year. Commercial loan net charge-offs
during 2010 were $3.9 million, residential mortgage loan net charge-offs were $811,000, and
installment loan net charge-offs were $5.1 million. Loan charge-offs continue to require
provisions for loan losses during the year but appeared to be stabilizing as the amount of
charge-offs have trended down during 2010 compared to 2009. However, the increase in
non-performing loans as specific reserves were identified for these loans, and the use of higher
historical charge-off ratios in the allowance for loan loss calculation, required additional
provision expense for loan losses.
Non-interest Income
The following is a summary of changes in non-interest income:
| 2009 to 2010 | 2008 to 2009 | |||||||||||||||||||||||||||
| December 31 | December 31 | Amount | Percent | December 31 | Amount | Percent | ||||||||||||||||||||||
| Non-interest income | 2010 | 2009 | Change | Change | 2008 | Change | Change | |||||||||||||||||||||
|
Service charges on deposit accounts
|
$ | 3,607 | $ | 3,858 | $ | (251 | ) | -6.5 | % | $ | 3,885 | $ | (27 | ) | -0.7 | % | ||||||||||||
|
Wire transfer fees
|
756 | 921 | (165 | ) | -17.9 | % | 528 | 393 | 74.4 | % | ||||||||||||||||||
|
Interchange fees
|
2,247 | 1,864 | 383 | 20.5 | % | 846 | 1,018 | 120.3 | % | |||||||||||||||||||
|
Fiduciary activities
|
3,979 | 3,336 | 643 | 19.3 | % | 3,713 | (377 | ) | -10.2 | % | ||||||||||||||||||
|
Gain (loss) on sale of securities
|
533 | 795 | (262 | ) | -33.0 | % | (15 | ) | 810 | -5400.0 | % | |||||||||||||||||
|
Gain on sale of mortgage loans
|
7,538 | 6,107 | 1,431 | 23.4 | % | 2,979 | 3,128 | 105.0 | % | |||||||||||||||||||
|
Mortgage servicing net of
impairment
|
(565 | ) | (134 | ) | (431 | ) | 321.6 | % | 20 | (154 | ) | -770.0 | % | |||||||||||||||
|
Increase in cash surrender value of bank owned life insurance
|
803 | 720 | 83 | 11.5 | % | 920 | (200 | ) | -21.7 | % | ||||||||||||||||||
|
Death benefit on officer life insurance
|
— | — | — | 0.0 | % | 538 | (538 | ) | -100.0 | % | ||||||||||||||||||
|
Other income
|
1,008 | 389 | 619 | 159.1 | % | 417 | (28 | ) | -6.7 | % | ||||||||||||||||||
|
Total non-interest income
|
$ | 19,906 | $ | 17,856 | $ | 2,050 | 11.5 | % | $ | 13,831 | $ | 4,025 | 29.1 | % | ||||||||||||||
During 2010 the Company originated approximately $281.7 million of mortgage loans to be sold
on the secondary market compared to $335.9 million last year. Better pricing and execution in the
secondary market has generated higher percentage gains on the sale of mortgage loans compared to
the same period in 2009 in addition to a higher overall gain on
50
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
sale of mortgage loans compared to the prior year. Wire transfer fee income decreased
compared to the prior year as the Company’s mortgage warehouse business line had less activity due
to decreased residential mortgage loan refinancing volume compared to the same period in 2009. The
decrease in service charge income has been the result of reduced overdraft fee income as the number
of consumer overdrafts has gone down. Also, due to the low interest rate environment, refinancing
activity, and lower origination volume, the mortgage servicing right asset had net impairment
during the period. These decreases were offset by increases in fiduciary income from the trust
department due to improved market values of managed assets and an increase in the interchange fees
due to higher levels of activity in ATM and debit card transactions. The net gain on the sale of
securities of $533,000 was the result of reallocating select municipal securities to reduce
concentration risks as well as an analysis that determined that market conditions provided the
opportunity to add gains to capital without negatively impacting long term earnings. Other income
for 2010 included $393,000 from the gain on sale of OREO compared to a $9,000 loss on the sale of
OREO in 2009.
Non-interest Expense
The following is a summary of changes in non-interest expense:
| 2009 to 2010 | 2008 to 2009 | |||||||||||||||||||||||||||
| December 31 | December 31 | Amount | Percent | December 31 | Amount | Percent | ||||||||||||||||||||||
| Non-interest expense | 2010 | 2009 | Change | Change | 2008 | Change | Change | |||||||||||||||||||||
|
Salaries
|
$ | 14,396 | $ | 12,518 | $ | 1,878 | 15.0 | % | $ | 11,730 | $ | 788 | 6.7 | % | ||||||||||||||
|
Commission and bonuses
|
3,731 | 3,221 | 510 | 15.8 | % | 1,947 | 1,274 | 65.4 | % | |||||||||||||||||||
|
Employee benefits
|
3,963 | 3,465 | 498 | 14.4 | % | 3,072 | 393 | 12.8 | % | |||||||||||||||||||
|
Net occupancy expenses
|
4,195 | 3,796 | 399 | 10.5 | % | 3,775 | 21 | 0.6 | % | |||||||||||||||||||
|
Data processing
|
1,925 | 1,582 | 343 | 21.7 | % | 1,437 | 145 | 10.1 | % | |||||||||||||||||||
|
Professional fees
|
1,701 | 1,413 | 288 | 20.4 | % | 1,133 | 280 | 24.7 | % | |||||||||||||||||||
|
Outside services and consultants
|
1,694 | 1,471 | 223 | 15.2 | % | 1,313 | 158 | 12.0 | % | |||||||||||||||||||
|
Loan expense
|
3,208 | 2,611 | 597 | 22.9 | % | 2,223 | 388 | 17.5 | % | |||||||||||||||||||
|
FDIC deposit insurance
|
1,635 | 2,126 | (491 | ) | -23.1 | % | 546 | 1,580 | 289.4 | % | ||||||||||||||||||
|
Other losses
|
504 | 510 | (6 | ) | -1.2 | % | 413 | 97 | 23.5 | % | ||||||||||||||||||
|
Other expenses
|
5,619 | 5,099 | 520 | 10.2 | % | 5,190 | (91 | ) | -1.8 | % | ||||||||||||||||||
|
Total non-interest expense
|
$ | 42,571 | $ | 37,812 | $ | 4,759 | 12.6 | % | $ | 32,779 | $ | 5,033 | 15.4 | % | ||||||||||||||
During 2010 the Company expensed $664,000 of transaction costs related to the purchase and
assumption of American Trust & Savings Bank. These one time expenses impacted salaries and
employee benefits by $145,000, data processing by $170,000, professional fees by $232,000, outside
services and consultants by $60,000, and other expenses by $57,000. Salaries, commission and
bonuses, and employee benefits increased during 2010 compared to the same period in 2009. This
increase is the result of additional payroll expense from the consolidation of the American Trust &
Savings Bank (“ATSB”) transaction that closed at the end of the second quarter, the expansion into
Kalamazoo, Michigan, an increase in bonus accruals based on the Company’s performance during 2010,
and higher health care costs. Net occupancy expenses increased during 2010 primarily due to the
ATSB transaction. Loan expense increased in 2010 compared to the same period in 2009 due to
problem loan, bankruptcy, and collection costs. Professional fees were higher compared to last
year due to litigation costs and increasing rules and regulations requiring additional professional
assistance and as a result of the American Trust & Savings Bank acquisition. The Company’s FDIC
expense decreased due to the $663,000 recorded in the second quarter of 2009 for the special FDIC
assessment. All other categories of non-interest expense did not have a significant change from
the prior year.
Income Taxes
Income tax expense for 2010 was $2.9 million compared to $2.1 million of tax expense for during
2009. The effective tax rate for 2010 was 22.0% compared to 18.5% in 2009 and 17.2% in 2008.
Tax refunds were received in both 2009 and 2008 in the amounts of $100,000 and $163,000.
Considering the impact of the $538,000 of income received in the second quarter of 2008 from the
death benefit on officer life insurance which was tax free and reduced taxable income and the tax
refunds received in both periods, the effective tax rates would have been
51
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
19.4% for 2009 compared to 20.7% in 2008. The increase in the effective tax rate in 2010 was primarily due to higher
income before income tax.
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 Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). At December 31,
2010, Horizon has available approximately $380.8 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 has outstanding borrowings of over $88.8 million with the FHLB and total borrowing capacity with the FHLB of $302.9 million. Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources making it cheaper to borrow money from the FHLB. Continued and additional financial difficulties at the FHLB could reduce or eliminate Horizon’s additional borrowing capacity with the FHLB. | ||
| • | If residential mortgage loan rates remain low, Horizon’s mortgage warehouse loans could increase creating an additional need for funding. | ||
| • | Horizon has a total of $94.0 million of Federal Fund lines from various money center banks. These are uncommitted lines and could be pulled at any time by the correspondent banks. | ||
| • | Horizon has a total of $99.3 million of available collateral at the Federal Reserve Bank secured by municipal securities. These securities may mature, call, or be sold reducing the available collateral. | ||
| • | A downgrade in Horizon’s public credit rating by a rating agency 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. | ||
| • | Horizon anticipates spending $3.4 million for premises and equipment during 2011, including one full service office. These purchases will be funded through normal operations. |
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.
In response to a financial crisis that was affecting the banking system and financial markets in
2008, EESA was signed into law on October 3, 2008, and established TARP. As part of TARP, the
Treasury established the CPP to provide up to
52
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
$700 billion of funding to eligible financial institutions through the purchase of mortgages, mortgage-backed securities, capital stock and other
financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.
On December 19, 2008 Horizon completed the sale to the Treasury of $25.0 million of Series A
Preferred Shares as part of the CPP. On November 10, 2010, Horizon redeemed $6.25 million of the
Series A Preferred Shares using excess cash at the holding company.
The American Recovery and Reinvestment Act of 2009 (ARRA), more commonly known as the economic
stimulus or economic recovery package, was signed into law on February 17, 2009, by President
Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain
new executive compensation and corporate expenditure limits on all current and future TARP
recipients, including Horizon, until the institution has repaid the Treasury, which is permitted
under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s
consultation with the recipient’s appropriate regulatory agency.
During 2010, cash flows were generated primarily from the sales, maturities, and prepayments of
investment securities of $215.8 million and the reduction in loans of $30.3 million. Cash flows
were used to purchase investments totaling $228.6 million, reduce deposits by $64.2 million, and
reduce borrowings by a net $32.0 million. The net cash and cash equivalent position decreased by
$53.0 million during 2010.
The following table sets forth contractual obligations and other commitments representing required
and potential cash outflows as of December 31, 2010. Interest on subordinated debentures and
long-term borrowed funds is calculated based on current contractual interest rates.
| After one | After three | After | ||||||||||||||||||
| Within | but within | but within | five | |||||||||||||||||
| (dollars in thousands) | Total | one year | three years | five years | years | |||||||||||||||
|
Remaining contractual maturities of time deposits
|
$ | 368,939 | $ | 183,851 | $ | 106,100 | $ | 33,772 | $ | 45,216 | ||||||||||
|
Borrowings
|
260,741 | 108,839 | 26,023 | 41,707 | 84,172 | |||||||||||||||
|
Subordinated debentures
|
30,584 | — | — | — | 30,584 | |||||||||||||||
|
Loan Commitments
|
252,428 | 252,428 | — | — | — | |||||||||||||||
|
Preferred stock
|
18,750 | 6,250 | 12,500 | — | — | |||||||||||||||
|
Letters of credit
|
1,120 | 1,120 | — | — | — | |||||||||||||||
|
Total
|
$ | 932,562 | $ | 552,488 | $ | 144,623 | $ | 75,479 | $ | 159,972 | ||||||||||
Interest 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 one
model at December 31, 2010 that assumes a lag in repricing, the amount of assets that reprice
within one year were 190% of liabilities that reprice within one year. This same model at December
31, 2009, reported that the amount of assets that reprice within one year were approximately 140%
of the amount of liabilities that reprice within the same time period. 2009 was a declining rate
environment and the rates on liabilities continued to repriced at lower rates due to managements
ability to lower those rates. The impact of the interest rate reduction along with interest rate
floors on certain loans positively impacted the net interest margin during 2010.
53
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
| Rate Sensitivity | ||||||||||||||||||||
| > 3 Months | Greater | |||||||||||||||||||
| 3 Months | & < 6 | > 6 Months | Than 1 | |||||||||||||||||
| or Less | Months | & < 1 Year | Year | Total | ||||||||||||||||
|
Loans
|
$ | 417,932 | $ | 91,759 | $ | 128,783 | $ | 263,236 | $ | 901,710 | ||||||||||
|
Federal Funds Sold
|
2,413 | — | — | — | 2,413 | |||||||||||||||
|
Interest-Bearing balances with Banks
|
2,745 | — | — | — | 2,745 | |||||||||||||||
|
Investment securities with FRB and
|
||||||||||||||||||||
|
FHLB stock
|
39,359 | 25,891 | 43,608 | 296,744 | 405,602 | |||||||||||||||
|
Other assets
|
27,195 | — | — | 61,254 | 88,449 | |||||||||||||||
|
Total Assets
|
$ | 489,644 | $ | 117,650 | $ | 172,391 | $ | 621,234 | $ | 1,400,919 | ||||||||||
|
|
||||||||||||||||||||
|
Noninterest-bearing deposits
|
$ | 6,912 | $ | 4,324 | $ | 7,953 | $ | 88,417 | $ | 107,606 | ||||||||||
|
Interest-bearing deposits
|
101,181 | 91,831 | 156,125 | 528,755 | 877,892 | |||||||||||||||
|
Borrowed Funds
|
34,157 | 2,131 | 4,825 | 250,212 | 291,325 | |||||||||||||||
|
Other Liabilities
|
— | — | — | 11,813 | 11,813 | |||||||||||||||
|
Stockholders’ equity
|
— | — | — | 112,283 | 112,283 | |||||||||||||||
|
Total liabilities
and stockholder’s
equity
|
$ | 142,250 | $ | 98,286 | $ | 168,903 | $ | 991,480 | $ | 1,400,919 | ||||||||||
|
GAP
|
$ | 347,394 | $ | 19,364 | $ | 3,488 | $ | (370,246 | ) | |||||||||||
|
Cumulative GAP
|
$ | 347,394 | $ | 366,758 | $ | 370,246 | ||||||||||||||
Included in the GAP analysis are certain interest-bearing demand accounts and savings
accounts. These interest-bearing accounts are subject to immediate withdrawal. However, Horizon
considers approximately 62.5% of these deposits to be insensitive to gradual changes in interest
rates and generally to behave like deposits with longer maturities based upon historical experience
and managements ability to change rates. Due to management’s ability to change some deposit rates
along with $298.0 million of Horizon’s adjustable rate loans at their floor, another model was
developed to better assist management in determining the balance sheets repricing sensitivity to
these variables. This model reported that the amount of assets that reprice within one year were
approximately 93% of the amount of liabilities that reprice within the same time period.
Management utilizes both models to best determine their balance sheet management.
| Repricing Sensitivity | ||||||||||||||||||||
| > 3 Months | Greater | |||||||||||||||||||
| 3 Months | & < 6 | > 6 Months | Than 1 | |||||||||||||||||
| or Less | Months | & < 1 Year | Year | Total | ||||||||||||||||
|
Loans
|
$ | 417,932 | $ | 91,759 | $ | 128,783 | $ | 263,236 | $ | 901,710 | ||||||||||
|
Federal Funds Sold
|
2,413 | — | — | — | 2,413 | |||||||||||||||
|
Interest-Bearing balances with Banks
|
2,745 | — | — | — | 2,745 | |||||||||||||||
|
Investment securities with FRB and
|
||||||||||||||||||||
|
FHLB stock
|
39,359 | 25,891 | 43,608 | 296,744 | 405,602 | |||||||||||||||
|
Other assets
|
27,195 | — | — | 61,254 | 88,449 | |||||||||||||||
|
Total Assets
|
$ | 489,644 | $ | 117,650 | $ | 172,391 | $ | 621,234 | $ | 1,400,919 | ||||||||||
|
Noninterest-bearing deposits
|
$ | 107,606 | $ | — | $ | — | $ | — | $ | 107,606 | ||||||||||
|
Interest-bearing deposits
|
550,830 | 57,835 | 84,140 | 185,087 | 877,892 | |||||||||||||||
|
Borrowed Funds
|
34,157 | 2,131 | 4,825 | 250,212 | 291,325 | |||||||||||||||
|
Other Liabilities
|
— | — | — | 11,813 | 11,813 | |||||||||||||||
|
Stockholders’ equity
|
— | — | — | 112,283 | 112,283 | |||||||||||||||
|
Total liabilities
and stockholder’s
equity
|
$ | 692,593 | $ | 59,966 | $ | 88,965 | $ | 559,395 | $ | 1,400,919 | ||||||||||
|
|
||||||||||||||||||||
|
GAP
|
$ | (202,949 | ) | $ | 57,684 | $ | 83,426 | $ | 61,839 | |||||||||||
|
Cumulative GAP
|
$ | (202,949 | ) | $ | (145,265 | ) | $ | (61,839 | ) | |||||||||||
54
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
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 is due to 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 arise 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 are
sensitive to changes in interest rates as of December 31, 2010. 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.
55
Table of Contents
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Quantitative Disclosure of Market Risk
| Fair Value | ||||||||||||||||||||||||||||||||
| 2016 | December 31 | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | & Beyond | Total | 2010 | |||||||||||||||||||||||||
|
Rate-sensitive assets
|
||||||||||||||||||||||||||||||||
|
Fixed interest rate loans
|
$ | 230,432 | $ | 91,470 | $ | 52,759 | $ | 29,415 | $ | 16,061 | $ | 35,532 | $ | 455,669 | $ | 446,417 | ||||||||||||||||
|
Average interest rate
|
6.11 | % | 6.87 | % | 6.85 | % | 6.72 | % | 6.57 | % | 6.84 | % | 6.46 | % | ||||||||||||||||||
|
Variable interest rate loans
|
408,041 | 15,546 | 14,305 | 3,771 | 2,453 | 1,925 | 446,041 | 458,534 | ||||||||||||||||||||||||
|
Average interest rate
|
5.44 | % | 5.80 | % | 5.70 | % | 5.54 | % | 5.47 | % | 5.05 | % | 5.46 | % | ||||||||||||||||||
|
Total loans
|
638,473 | 107,016 | 67,064 | 33,186 | 18,514 | 37,457 | 901,710 | 904,951 | ||||||||||||||||||||||||
|
Average interest rate
|
5.68 | % | 6.71 | % | 6.61 | % | 6.59 | % | 6.42 | % | 6.75 | % | 5.97 | % | ||||||||||||||||||
|
Securities, including FRB and
FHLB stock
|
108,858 | 61,045 | 40,121 | 36,839 | 32,134 | 126,605 | 405,602 | 405,603 | ||||||||||||||||||||||||
|
Average interest rate
|
3.66 | % | 4.05 | % | 4.22 | % | 4.13 | % | 3.97 | % | 4.16 | % | 4.00 | % | ||||||||||||||||||
|
Other interest-bearing assets
|
5,158 | — | — | — | — | — | 5,158 | 5,158 | ||||||||||||||||||||||||
|
Average interest rate
|
0.45 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.45 | % | ||||||||||||||||||
|
Total earnings assets
|
$ | 752,489 | $ | 168,061 | $ | 107,185 | $ | 70,025 | $ | 50,648 | $ | 164,062 | $ | 1,312,470 | $ | 1,315,713 | ||||||||||||||||
|
Average interest rate
|
5.35 | 5.75 | 5.71 | 5.30 | 5.75 | 4.75 | 5.34 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Rate-sensitive liabilities
|
||||||||||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
$ | 16,601 | $ | 14,040 | $ | 11,874 | $ | 10,042 | $ | 8,493 | $ | 46,556 | $ | 107,606 | $ | 107,606 | ||||||||||||||||
|
NOW accounts
|
94,795 | 46,228 | 38,800 | 31,413 | 24,005 | 110,047 | 345,288 | 322,207 | ||||||||||||||||||||||||
|
Average interest rate
|
0.19 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | ||||||||||||||||||
|
Savings and money market accounts
|
46,398 | 33,114 | 24,073 | 17,091 | 11,992 | 30,997 | 163,665 | 158,316 | ||||||||||||||||||||||||
|
Average interest rate
|
0.16 | % | 0.16 | % | 0.17 | % | 0.17 | % | 0.17 | % | 0.18 | % | 0.17 | % | ||||||||||||||||||
|
Certificates of deposit
|
183,851 | 63,180 | 42,920 | 15,335 | 18,437 | 45,216 | 368,939 | 374,094 | ||||||||||||||||||||||||
|
Average interest rate
|
2.08 | % | 2.70 | % | 2.17 | % | 2.93 | % | 2.31 | % | 3.40 | % | 2.41 | % | ||||||||||||||||||
|
Total deposits
|
341,645 | 156,562 | 117,667 | 73,881 | 62,927 | 232,816 | 985,498 | 962,223 | ||||||||||||||||||||||||
|
Average interest rate
|
1.20 | % | 1.18 | % | 0.89 | % | 0.73 | % | 0.79 | % | 0.78 | % | 1.00 | % | ||||||||||||||||||
|
Fixed interest rate borrowings
|
32,861 | 10,810 | 15,213 | 20,769 | 20,938 | 114,756 | 215,347 | 249,745 | ||||||||||||||||||||||||
|
Average interest rate
|
0.27 | % | 3.26 | % | 3.77 | % | 2.28 | % | 2.62 | % | 3.60 | % | 2.87 | % | ||||||||||||||||||
|
Variable interest rate borrowings
|
75,978 | — | — | — | — | — | 75,978 | 70,370 | ||||||||||||||||||||||||
|
Average interest rate
|
2.42 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 2.42 | % | ||||||||||||||||||
|
Total funds
|
$ | 450,484 | $ | 167,372 | $ | 132,880 | $ | 94,650 | $ | 83,865 | $ | 347,572 | $ | 1,276,823 | $ | 1,282,338 | ||||||||||||||||
|
Average interest rate
|
1.34 | % | 1.32 | % | 1.22 | % | 1.07 | % | 1.24 | % | 1.71 | % | 1.40 | % | ||||||||||||||||||
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 operation included in
Item 7.
56
Horizon Bancorp And Subsidiaries
Consolidated Financial Statements
Table of Contents
Consolidated Financial Statements
Table of Contents
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| 103 | ||||||||
| EX-10.21 | ||||||||
| EX-21 | ||||||||
| EX-23 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-99.1 | ||||||||
| EX-99.2 | ||||||||
57
Table of Contents
Horizon Bancorp And Subsidiaries
(Dollar Amounts in Thousands)
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 15,683 | $ | 68,702 | ||||
|
Investment securities, available for sale
|
382,344 | 333,132 | ||||||
|
Investment securities, held to maturity
|
9,595 | 11,657 | ||||||
|
Loans held for sale
|
18,833 | 5,703 | ||||||
|
Loans, net of allowance for loan losses of $19,064 and $16,015
|
863,813 | 870,302 | ||||||
|
Premises and equipment
|
34,194 | 30,534 | ||||||
|
Federal Reserve and Federal Home Loan Bank stock
|
13,664 | 13,189 | ||||||
|
Goodwill
|
5,910 | 5,787 | ||||||
|
Other intangible assets
|
2,741 | 1,447 | ||||||
|
Interest receivable
|
6,519 | 5,986 | ||||||
|
Cash value life insurance
|
27,195 | 23,139 | ||||||
|
Other assets
|
20,428 | 17,442 | ||||||
|
Total assets
|
$ | 1,400,919 | $ | 1,387,020 | ||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Non-interest bearing
|
$ | 107,606 | $ | 84,357 | ||||
|
Interest bearing
|
877,892 | 867,351 | ||||||
|
Total deposits
|
985,498 | 951,708 | ||||||
|
Borrowings
|
260,741 | 284,016 | ||||||
|
Subordinated debentures
|
30,584 | 27,837 | ||||||
|
Interest payable
|
781 | 1,135 | ||||||
|
Other liabilities
|
11,032 | 7,719 | ||||||
|
Total liabilities
|
1,288,636 | 1,272,415 | ||||||
|
Commitments and contingent liabilities
Stockholders’ Equity
|
||||||||
|
Preferred stock, no par value, $1,000 liquidation value
Authorized, 1,000,000 shares
Issued 18,750 and 25,000 shares
|
18,217 | 24,306 | ||||||
|
Common stock, $.2222 stated value
Authorized, 22,500,000 shares
Issued, 3,300,659 and 3,273,881 shares
|
1,122 | 1,119 | ||||||
|
Additional paid-in capital
|
10,356 | 10,030 | ||||||
|
Retained earnings
|
80,240 | 73,431 | ||||||
|
Accumulated other comprehensive income
|
2,348 | 5,719 | ||||||
|
Total stockholders’ equity
|
112,283 | 114,605 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,400,919 | $ | 1,387,020 | ||||
See notes to consolidated financial statements
58
Table of Contents
Horizon Bancorp And Subsidiaries
(Dollar Amounts in Thousands, Except Per Share Data)
| Years Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest Income
|
||||||||||||
|
Loans receivable
|
$ | 54,738 | $ | 57,836 | $ | 57,801 | ||||||
|
Investment securities
|
||||||||||||
|
Taxable
|
9,605 | 10,885 | 9,111 | |||||||||
|
Tax exempt
|
4,148 | 3,942 | 3,323 | |||||||||
|
Total interest income
|
68,491 | 72,663 | 70,235 | |||||||||
|
Interest Expense
|
||||||||||||
|
Deposits
|
10,711 | 14,792 | 19,536 | |||||||||
|
Borrowed funds
|
8,476 | 11,696 | 11,772 | |||||||||
|
Subordinated debentures
|
1,688 | 1,406 | 1,577 | |||||||||
|
Total interest expense
|
20,875 | 27,894 | 32,885 | |||||||||
|
Net Interest Income
|
47,616 | 44,769 | 37,350 | |||||||||
|
Provision for loan losses
|
11,554 | 13,603 | 7,568 | |||||||||
|
Net Interest Income after Provision for Loan Losses
|
36,062 | 31,166 | 29,782 | |||||||||
|
Other Income
|
||||||||||||
|
Service charges on deposit accounts
|
3,607 | 3,858 | 3,885 | |||||||||
|
Wire transfer fees
|
756 | 921 | 528 | |||||||||
|
Interchange fees
|
2,247 | 1,864 | 846 | |||||||||
|
Fiduciary activities
|
3,979 | 3,336 | 3,713 | |||||||||
|
Gain (loss) on sale of securities
|
533 | 795 | (15 | ) | ||||||||
|
Gain on sale of mortgage loans
|
7,538 | 6,107 | 2,979 | |||||||||
|
Mortgage servicing income net of impairment
|
(565 | ) | (134 | ) | 20 | |||||||
|
Increase in cash surrender value of bank owned life insurance
|
803 | 720 | 920 | |||||||||
|
Death benefit on officer life insurance
|
— | — | 538 | |||||||||
|
Other income
|
1,008 | 389 | 417 | |||||||||
|
Total other income
|
19,906 | 17,856 | 13,831 | |||||||||
|
Other Expenses
|
||||||||||||
|
Salaries and employee benefits
|
22,090 | 19,204 | 16,749 | |||||||||
|
Net occupancy expenses
|
4,195 | 3,796 | 3,775 | |||||||||
|
Data processing
|
1,925 | 1,582 | 1,437 | |||||||||
|
Professional fees
|
1,701 | 1,413 | 1,133 | |||||||||
|
Outside services and consultants
|
1,694 | 1,471 | 1,313 | |||||||||
|
Loan expense
|
3,208 | 2,611 | 2,223 | |||||||||
|
FDIC insurance expense
|
1,635 | 2,126 | 546 | |||||||||
|
Other losses
|
504 | 510 | 413 | |||||||||
|
Other expenses
|
5,619 | 5,099 | 5,190 | |||||||||
|
Total other expenses
|
42,571 | 37,812 | 32,779 | |||||||||
|
Income Before Income Tax
|
13,397 | 11,210 | 10,834 | |||||||||
|
Income tax expense
|
2,942 | 2,070 | 1,862 | |||||||||
|
Net Income
|
10,455 | 9,140 | 8,972 | |||||||||
|
Preferred stock dividend and discount accretion
|
(1,406 | ) | (1,402 | ) | (45 | ) | ||||||
|
Net Income Available to Common Shareholders
|
$ | 9,049 | $ | 7,738 | $ | 8,927 | ||||||
|
Basic Earnings Per Share
|
$ | 2.76 | $ | 2.39 | $ | 2.78 | ||||||
|
Diluted Earnings Per Share
|
2.71 | 2.37 | 2.75 | |||||||||
See notes to consolidated financial statements
59
Table of Contents
Horizon Bancorp And Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Dollar Amounts in Thousands, Except Per Share Data)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Preferred | Common | Paid-in | Comprehensive | Retained | Comprehensive | |||||||||||||||||||||||
| Stock | Stock | Capital | Income | Earnings | Income | Total | ||||||||||||||||||||||
|
Balances, January 1, 2008
|
$ | — | $ | 1,114 | $ | 8,486 | $ | 60,982 | $ | 63 | $ | 70,645 | ||||||||||||||||
|
Net income
|
$ | 8,972 | 8,972 | 8,972 | ||||||||||||||||||||||||
|
Issuance of preferred stock
|
25,000 | 25,000 | ||||||||||||||||||||||||||
|
Discount on preferred stock
|
(849 | ) | 849 | — | ||||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||||
|
Unrealized gain on securities
|
1,118 | 1,118 | 1,118 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Unrealized loss on derivative instruments
|
(553 | ) | (553 | ) | (553 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 9,537 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Amortization of unearned compensation
|
233 | 233 | ||||||||||||||||||||||||||
|
Exercise of stock options
|
35 | 35 | ||||||||||||||||||||||||||
|
Tax benefit related to stock options
|
8 | 8 | ||||||||||||||||||||||||||
|
Stock option expense
|
39 | 39 | ||||||||||||||||||||||||||
|
Cash dividends on common stock ($.66 per share)
|
(2,147 | ) | (2,147 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Accretion of discount on preferred stock
|
3 | (3 | ) | — | ||||||||||||||||||||||||
|
Balances, December 31, 2008
|
$ | 24,151 | $ | 1,114 | $ | 9,650 | $ | 67,807 | $ | 628 | $ | 103,350 | ||||||||||||||||
|
Net income
|
$ | 9,140 | 9,140 | 9,140 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Unrealized gain on securities
|
4,260 | 4,260 | 4,260 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Unrealized gain on derivative instruments
|
831 | 831 | 831 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 14,231 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Amortization of unearned compensation
|
164 | 164 | ||||||||||||||||||||||||||
|
Issuance of restricted shares
|
3 | 93 | 96 | |||||||||||||||||||||||||
|
Exercise of stock options
|
2 | 66 | 68 | |||||||||||||||||||||||||
|
Tax benefit related to stock options
|
18 | 18 | ||||||||||||||||||||||||||
|
Stock option expense
|
39 | 39 | ||||||||||||||||||||||||||
|
Cash dividends on preferred stock (5.00%)
|
(1,132 | ) | (1,132 | ) | ||||||||||||||||||||||||
|
Cash dividends on common stock ($.68 per share)
|
(2,229 | ) | (2,229 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Accretion of discount on preferred stock
|
152 | (152 | ) | — | ||||||||||||||||||||||||
|
Balances, December 31, 2009
|
$ | 24,306 | $ | 1,119 | $ | 10,030 | $ | 73,431 | $ | 5,719 | $ | 114,605 | ||||||||||||||||
|
Net income
|
$ | 10,455 | 10,455 | 10,455 | ||||||||||||||||||||||||
|
Redemption of preferred stock
|
(6,250 | ) | (6,250 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Unrealized loss on securities
|
(2,199 | ) | (2,199 | ) | (2,199 | ) | ||||||||||||||||||||||
|
Unrealized loss on derivative
instruments
|
(1,172 | ) | (1,172 | ) | (1,172 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 7,084 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Amortization of unearned compensation
|
68 | 68 | ||||||||||||||||||||||||||
|
Issuance of restricted shares
|
34 | 34 | ||||||||||||||||||||||||||
|
Exercise of stock options
|
3 | 117 | 120 | |||||||||||||||||||||||||
|
Tax benefit related to stock options
|
77 | 77 | ||||||||||||||||||||||||||
|
Stock option expense
|
30 | 30 | ||||||||||||||||||||||||||
|
Cash dividends on preferred stock (5.00%)
|
(1,245 | ) | (1,245 | ) | ||||||||||||||||||||||||
|
Cash dividends on common stock ($.68 per share)
|
(2,240 | ) | (2,240 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Accretion of discount on preferred stock
|
161 | (161 | ) | — | ||||||||||||||||||||||||
|
Balances, December 31, 2010
|
$ | 18,217 | $ | 1,122 | $ | 10,356 | $ | 80,240 | $ | 2,348 | $ | 112,283 | ||||||||||||||||
See notes to consolidated financial statements
60
Table of Contents
Horizon Bancorp And Subsidiaries
(Dollar Amounts in Thousands)
| Years Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operating Activities
|
||||||||||||
|
Net income
|
$ | 10,455 | $ | 9,140 | $ | 8,972 | ||||||
|
Items not requiring (providing) cash
|
||||||||||||
|
Provision for loan losses
|
11,554 | 13,603 | 7,568 | |||||||||
|
Depreciation and amortization
|
2,320 | 2,280 | 2,321 | |||||||||
|
Share based compensation
|
30 | 39 | 39 | |||||||||
|
Mortgage servicing rights impairment
|
664 | 135 | (20 | ) | ||||||||
|
Deferred income tax
|
(113 | ) | (713 | ) | (485 | ) | ||||||
|
Premium amortization on securities available for sale, net
|
1,946 | 729 | (266 | ) | ||||||||
|
Gain on sale of investment securities
|
(533 | ) | (795 | ) | 15 | |||||||
|
Gain on sale of mortgage loans
|
(7,538 | ) | (6,107 | ) | (2,747 | ) | ||||||
|
Proceeds from sales of loans
|
286,960 | 339,424 | 145,473 | |||||||||
|
Loans originated for sale
|
(281,705 | ) | (335,871 | ) | (140,462 | ) | ||||||
|
Increase in cash surrender value of life insurance
|
(770 | ) | (720 | ) | (36 | ) | ||||||
|
(Gain) Loss on sale of other real estate owned
|
(393 | ) | 9 | (22 | ) | |||||||
|
Net change in
|
||||||||||||
|
Interest receivable
|
— | (278 | ) | 189 | ||||||||
|
Interest payable
|
(354 | ) | (775 | ) | (790 | ) | ||||||
|
Other assets
|
296 | (5,704 | ) | (769 | ) | |||||||
|
Other liabilities
|
2,057 | 316 | 442 | |||||||||
|
Net cash provided by operating activities
|
24,876 | 14,712 | 19,422 | |||||||||
|
Investing Activities
|
||||||||||||
|
Purchases of securities available for sale
|
(203,840 | ) | (137,723 | ) | (115,895 | ) | ||||||
|
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale
|
204,647 | 112,377 | 50,903 | |||||||||
|
Purchase of securities held to maturity
|
(24,732 | ) | (24,726 | ) | (1,800 | ) | ||||||
|
Proceeds from maturities of securities held to maturity
|
11,167 | 15,171 | 170 | |||||||||
|
Purchase of Federal Reserve Bank stock
|
861 | (564 | ) | — | ||||||||
|
Net change in loans
|
32,577 | (20,394 | ) | (37,824 | ) | |||||||
|
Proceeds on the sale of OREO and repossessed assets
|
6,137 | 8,242 | 434 | |||||||||
|
Purchases of premises and equipment
|
(2,414 | ) | (4,066 | ) | (5,442 | ) | ||||||
|
Purchases and assumption of American Trust & Savings Bank
|
3,412 | — | — | |||||||||
|
Proceeds from sale of loans transferred to held for sale
|
— | — | 37,695 | |||||||||
|
Gain on sale of loans transferred to held for sale
|
— | — | (193 | ) | ||||||||
|
Net cash provided by (used in) investing activities
|
27,815 | (51,683 | ) | (71,952 | ) | |||||||
|
Financing Activities
|
||||||||||||
|
Net change in
|
||||||||||||
|
Deposits
|
(64,227 | ) | 110,539 | (52,495 | ) | |||||||
|
Borrowings
|
(31,979 | ) | (40,367 | ) | 65,531 | |||||||
|
Proceeds (Redemption) of preferred stock
|
(6,250 | ) | — | 25,000 | ||||||||
|
Proceeds from issuance of stock
|
154 | 164 | 35 | |||||||||
|
Tax benefit from issuance of stock
|
77 | 18 | 8 | |||||||||
|
Dividends paid on common shares
|
(2,240 | ) | (1,132 | ) | — | |||||||
|
Dividends paid on preferred shares
|
(1,245 | ) | (2,229 | ) | (2,147 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
(105,710 | ) | 66,993 | 35,932 | ||||||||
|
Net Change in Cash and Cash Equivalent
|
(53,019 | ) | 30,022 | (16,598 | ) | |||||||
|
Cash and Cash Equivalents, Beginning of Period
|
68,702 | 38,680 | 55,278 | |||||||||
|
Cash and Cash Equivalents, End of Period
|
$ | 15,683 | $ | 68,702 | $ | 38,680 | ||||||
|
Additional Cash Flows Information
|
||||||||||||
|
Interest paid
|
$ | 21,228 | $ | 28,668 | $ | 33,675 | ||||||
|
Income taxes paid
|
3,880 | 3,155 | 2,935 | |||||||||
|
Transfer of loans to other real estate owned
|
9,026 | 6,481 | 3,157 | |||||||||
See notes to consolidated financial statements
61
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
(Table dollars in thousands except for per share data)
Nature of Business
— The consolidated financial statements of Horizon Bancorp (Horizon) and its
wholly owned subsidiary, Horizon Bank, N.A. (Bank) conform to accounting principles generally
accepted in the United States of America and reporting practices followed by the banking industry.
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 has two active
wholly owned subsidiaries, Horizon Investments, Inc. (Investment Company) and Horizon Grantor
Trust. Horizon Investments, Inc. manages the investment portfolio of the Bank. Horizon Grantor
Trust holds title to certain company owned life insurance policies. The Bank maintains 21 full
service facilities and one loan and deposit production office. The Bank also wholly owns Horizon
Insurance Services, Inc. (Insurance Agency) which is inactive, but previously offered a full line
of personal and corporate insurance products. The net income generated from the insurance
operations was not significant to the overall operations of Horizon and the majority of the
insurance agency assets were sold during 2005. Horizon conducts no business except that incident
to its ownership of the subsidiaries.
Horizon formed Horizon Statutory Trust II in 2004 and Horizon Bancorp Capital Trust III in 2006 for
the purpose of participating in Pooled Trust Preferred Stock offerings. The Company assumed
additional debentures as the result of the acquisition of Alliance in 2005 which formed Alliance
Financial Statutory Trust I (Alliance Trust) and American Trust & Savings Bank in 2010 which formed
Am Tru Statutory Trust I (Am Tru Trust). See Note 12 for further discussion regarding these
previously consolidated entities that are now reported separately.
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.
Fair Value Measurements
— Horizon uses fair value measurements to record fair value adjustments,
to certain assets, and liabilities and to determine fair value disclosures. Effective January 1,
2008, Horizon 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 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.
62
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 Corporation
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. 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.
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
— Loans held for sale are reported at the lower of cost or market value in the
aggregate.
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
63
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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.
Concentrations of Credit Risk
— The Bank grants commercial, real estate, and consumer loans to
customers located primarily in Northwest Indiana and southwest Michigan and provides mortgage
warehouse lines to mortgage companies in the United States. Commercial loans make up approximately
37% 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 20% of the loan portfolio and are secured by residential real estate. Installment
loans make up approximately 30% of the loan portfolio and are primarily secured by consumer assets.
Mortgage warehouse loans make up approximately 13% of the loan portfolio and are secured by
residential real estate.
Mortgage Warehouse Loans
— Horizon’s mortgage warehousing business line has specific mortgage
companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage
companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement
with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold
to the secondary market by the mortgage company. In addition, Horizon takes possession of each
original note and forwards such note to the end investor once the mortgage company has sold the
loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases
the loan under its option within the agreement.
Due to the repurchase feature contained in the agreement, the transaction does not qualify as a
sale 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 payoff the loan balance with Horizon along with any accrued
interest and any related fees. The remaining balance from the sale is forwarded to the mortgage
company. These individual loans typically are sold by the mortgage company within 30 days and are
seldom held more than 90 days. Interest income is accrued during this period and collected at the
time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no
costs are deferred due to the term between each loan funding and related payoff is typically less
than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase
from Horizon their outstanding loan balance on an individual mortgage and regain possession of the
original note. Horizon also has the option to request that the mortgage company repurchase an
individual mortgage. Should this occur, Horizon would return the original note and reassign the
assignment of the mortgage to the mortgage company. Also, in the event that the end investor would
not be able to honor the sales commitment and the mortgage company would not be able to repurchase
its loan on an individual mortgage, Horizon would be able to exercise its rights under the
agreement.
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.
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.
64
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 120 or more days past due.
Loans are considered impaired if 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.
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 (FHLBI) systems. The required investment in the common stock is based on a predetermined
formula.
Mortgage Servicing Rights
— Mortgage servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the mortgage loans between the mortgage servicing
rights and the loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenue. Impairment of
mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate. For purposes of
measuring impairment, the rights are stratified based on the predominant risk characteristics of
the underlying loans. The predominant characteristic currently used for stratification is type of
loan. The amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value. Amortization expense and charges related
to an impairment write-down are included in other income.
Goodwill
— Goodwill is tested annually for impairment. At December 31, 2010, Horizon had core
deposit intangibles of $2.7 million subject to amortization and $5.9 million of goodwill, which is
not subject to amortization. Goodwill arising from business combinations represents the value
attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill
relates to the value inherent in the banking industry and that value is dependent upon the ability
of Horizon to provide quality, cost effective banking services in a competitive marketplace. The
goodwill value is supported by revenue that is in part driven by the volume of business transacted.
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
$5.9 million and $5.8 million at December 31, 2010 and 2009, respectively. A large majority of the
goodwill relates to the acquisition of Alliance Financial Corporation.
65
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Income Taxes
— Horizon files annual consolidated income tax returns with its subsidiaries.
Income tax in the consolidated statements of income includes deferred income tax provisions or
benefits for all significant temporary differences in recognizing income and expenses for financial
reporting and income tax purposes.
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.
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.
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Basic earnings per share
|
||||||||||||
|
Net income
|
$ | 10,455 | $ | 9,140 | $ | 8,972 | ||||||
|
Less: Preferred stock dividends and accretion of discount
|
1,406 | 1,402 | 45 | |||||||||
|
Net income available to common shareholders
|
$ | 9,049 | $ | 7,738 | $ | 8,927 | ||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
3,277,069 | 3,232,033 | 3,208,658 | |||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 2.76 | $ | 2.39 | $ | 2.78 | ||||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Net income available to common shareholders
|
$ | 9,049 | $ | 7,738 | $ | 8,927 | ||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
3,277,069 | 3,232,033 | 3,208,658 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Warrants
|
40,436 | — | — | |||||||||
|
Restricted stock
|
14,685 | 32,284 | 29,889 | |||||||||
|
Stock options
|
2,408 | 6,406 | 7,804 | |||||||||
|
Weighted average shares outstanding
|
3,334,598 | 3,270,723 | 3,246,351 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 2.71 | $ | 2.37 | $ | 2.75 | ||||||
At December 31, 2010, 2009, and 2008 there were 48,333 shares, 71,514 shares, and 59,771
shares that were not included in the computation of diluted earnings per share because they were
non-dilutive.
Dividend Restrictions
— Regulations of the Comptroller of the Currency limit the amount of
dividends that may be paid by a national bank to its parent holding company without prior approval
of the Comptroller of the Currency. At
December 31, 2010, $13.7 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. Under the Capital Purchase Program
pursuant to which Horizon issued the Preferred Stock, Horizon cannot increase the amount of the
dividend it pays on its common shares while the Preferred Stock is outstanding without the prior
consent of the Treasury. The preferred Stock qualifies as Tier I capital and will pay cumulative
dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. This
further limits the amount of net income available to the common shareholders.
Due to Horizon participation in the CPP Program in December 2008, Horizon is prohibited from
increasing its common stock dividends for the first three years, while Treasury is an investor,
without the prior consent of the Treasury.
66
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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.
Share-Based Compensation
— At December 31, 2010, Horizon has stock option plans, which are
described more fully in Note 19. All share-based payments 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 $30,000, $39,000, and $39,000 for 2010, 2009, and 2008, in compensation
expense relating to vesting of stock options less estimated forfeitures for the 12 month period
ended December 31, 2010 and 2009.
Current Economic Conditions
— The current economic environment presents financial institutions
with unprecedented circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and significant credit
quality problems, including severe volatility in the valuation of real estate and other collateral
supporting loans. The financial statements have been prepared using values and information
currently available to Horizon.
Given the volatility of current economic conditions, the values of assets and liabilities recorded
in the financial statements could change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses and capital that could negatively impact Horizon’s ability to
meet regulatory capital requirements and maintain sufficient liquidity.
Reclassifications
— Certain reclassifications have been made to the 2009 and 2008 consolidated
financial statements to be comparable to 2010. These reclassifications had no effect on net
income.
Recent Accounting Pronouncements
FASB ASU 2009-16, Transfers and Servicing (Topic 860); Accounting for Transfers of Financial Assets
—
ASU 2009-16 requires more information about transfers of financial assets, including
securitization transactions, and where entities have continued exposure to the risks related to
transferred assets. The Company adopted ASU 2009-16 effective January 1, 2010 and adoption did not
have a material effect on its financial position or results of operations.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements.
ASU 2010-06 revises two disclosure requirements concerning fair value
measurements and clarifies two others. It requires separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such
transfers. It will also require the presentation of purchases, sales, issuances, and settlements
within Level 3 on a gross basis rather than a net basis. The amendments also clarify that
disclosures should be disaggregated by class of asset or liability and that disclosures about
inputs and valuation techniques should be provided for both recurring and non-recurring fair value
measurements. The Company’s disclosures about fair value measurements are presented in Note 21
Disclosures About Fair Value of Assets and Liabilities. These new disclosure requirements were
effective for the period ended March 31, 2010, except for the requirement concerning gross
presentation of Level 3 activity, which is effective for fiscal years beginning after December 15,
2010. There was no significant effect to the Company’s financial statement disclosure upon
adoption of this ASU.
ASU No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure
Requirements
. ASU 2010-09 amends the subsequent events disclosure guidance. The amendments
include a definition of an SEC filer, requires an SEC filer or conduit bond obligor to evaluate
subsequent events through the date the financial statements are issued, and removes the requirement
for an SEC filer to disclose the date through which subsequent events have been evaluated. ASU
2010-09 was effective upon issuance for the Company.
ASU
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
. ASU 2010-20 requires that more information be
disclosed about the credit quality of a company’s loans and the
allowance for loan losses held against those loans. A company will need to disaggregate new and
existing disclosure based on how it develops its allowance for loan losses and how it manages
credit exposures. Existing disclosures to be presented
67
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
on a disaggregated basis include a roll-forward of the allowance for loan losses, the related
recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional
disclosure is also required about the credit quality indicators of loans by class at the end of the
reporting period, the aging of past due loans, information about troubled debt restructurings, and
significant purchases and sales of loans during the reporting period by class.
For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period
effective for periods ending on or after December 15, 2010. Other required disclosures about
activity that occurs during a reporting period are effective for periods beginning on or after
December 15, 2010. The Company’s adoption of these additional disclosures can be found in notes
4, 5 and 6.
ASU
No. 2011-01; The amendments in ASU No. 2011-01 temporarily delay the effective date of the
disclosures about troubled debt restructurings in Accounting Standards Update No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
for public entities. The delay is intended to allow the Board time to
complete its deliberations on what constitutes a troubled debt restructuring. The effective date
of the new disclosures about troubled debt restructurings for public entities and the guidance for
determining what constitutes a troubled debt restructuring will then be coordinated.
The Company considers all liquid investments with original maturities of three months or less
to be cash equivalents. At December 31, 2010 and 2009, cash equivalents consisted primarily of
deposit accounts with financial institutions.
One or more of the financial institutions holding the Company’s cash accounts are participating in
the FDIC’s Transaction Account Guarantee Program. Under the program, as a result of changes made
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and
regulations adopted by the FDIC to implement the Dodd-Frank Act provisions, all noninterest-bearing
transaction accounts at these institutions are fully guaranteed by the FDIC for the entire amount
in the account until December 31, 2012.
For financial institutions opting out of the FDIC’s Transaction Account Guarantee Program or
interest-bearing cash accounts, the FDIC’s insurance limits increased to $250,000, effective
October 3, 2008. The increase in federally insured limits, which was set to expire December 31,
2013, was made permanent by the Dodd-Frank Act. At December 31, 2010, the Company’s cash accounts
exceeded federally insured limits by approximately $3.6 million. At December 31, 2010, the Company
had cash balances at the Federal Reserve Bank and Federal Home Loan Bank of Indianapolis of $1.6
million that did not have FDIC insurance coverage.
68
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The fair value of securities is as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| December 31, 2010 | Cost | Gains | Losses | Value | ||||||||||||
|
Available for sale
|
||||||||||||||||
|
U.S. Treasury and federal agencies
|
$ | 24,727 | $ | 643 | $ | (119 | ) | $ | 25,251 | |||||||
|
State and municipal
|
132,380 | 1,511 | (2,402 | ) | 131,489 | |||||||||||
|
Federal agency collateralized mortgage obligations
|
100,106 | 1,945 | (214 | ) | 101,837 | |||||||||||
|
Federal agency mortgage-backed pools
|
114,390 | 3,865 | (360 | ) | 117,895 | |||||||||||
|
Private labeled mortgage-backed pools
|
5,197 | 126 | — | 5,323 | ||||||||||||
|
Corporate notes
|
555 | — | (6 | ) | 549 | |||||||||||
|
Total available for sale investment securities
|
$ | 377,355 | $ | 8,090 | $ | (3,101 | ) | $ | 382,344 | |||||||
|
Held to maturity, State and Municipal
|
$ | 9,595 | $ | — | $ | — | $ | 9,595 | ||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| December 31, 2009 | Cost | Gains | Losses | Value | ||||||||||||
|
Available for sale
|
||||||||||||||||
|
U.S. Treasury and federal agencies
|
$ | 19,612 | $ | 473 | $ | — | $ | 20,085 | ||||||||
|
State and municipal
|
107,160 | 2,402 | (413 | ) | 109,149 | |||||||||||
|
Federal agency collateralized mortgage obligations
|
76,222 | 1,089 | (22 | ) | 77,289 | |||||||||||
|
Federal agency mortgage-backed pools
|
113,633 | 5,028 | — | 118,661 | ||||||||||||
|
Private labeled mortgage-backed pools
|
7,779 | 32 | (205 | ) | 7,606 | |||||||||||
|
Corporate notes
|
355 | — | (13 | ) | 342 | |||||||||||
|
Total available for sale investment securities
|
$ | 324,761 | $ | 9,024 | $ | (653 | ) | $ | 333,132 | |||||||
|
Held to maturity, State and Municipal
|
$ | 11,657 | $ | 30 | $ | — | $ | 11,687 | ||||||||
Based on evaluation of available evidence, including recent changes in market interest rates,
credit rating information, and information obtained from regulatory filings, management believes
the declines in fair value for these securities are temporary. While these securities are held in
the available for sale portfolio, Horizon intends and has the ability to hold them until the
earlier of a recovery in fair value or maturity.
Should the impairment of any of these securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net income in the period the
other-than-temporary impairment is identified. At December 31, 2010, 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, federal
agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by
interest rate increases 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 or 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 maturity, the Company did not consider those investments to be
other-than-temporarily impaired at December 31, 2010.
69
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The amortized cost and fair value of securities available for sale and held to maturity at
December 31, 2010 and December 31, 2009, 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, 2010 | December 31, 2009 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
|
Available for sale
|
||||||||||||||||
|
Within one year
|
$ | 855 | $ | 866 | $ | 2,658 | $ | 2,691 | ||||||||
|
One to five years
|
28,240 | 28,949 | 5,449 | 5,682 | ||||||||||||
|
Five to ten years
|
44,179 | 44,450 | 40,557 | 41,400 | ||||||||||||
|
After ten years
|
84,388 | 83,024 | 78,463 | 79,803 | ||||||||||||
|
|
157,662 | 157,289 | 127,127 | 129,576 | ||||||||||||
|
Federal agency collateralized mortgage obligations
|
100,106 | 101,837 | 76,222 | 77,289 | ||||||||||||
|
Federal agency mortgage-backed pools
|
114,390 | 117,895 | 113,633 | 118,661 | ||||||||||||
|
Private labeled mortgage-backed pools
|
5,197 | 5,323 | 7,779 | 7,606 | ||||||||||||
|
Total available for sale investment securities
|
$ | 377,355 | $ | 382,344 | $ | 324,761 | $ | 333,132 | ||||||||
|
|
||||||||||||||||
|
Held to maturity
|
||||||||||||||||
|
Within one year
|
$ | 9,495 | $ | 9,495 | $ | 11,462 | $ | 11,484 | ||||||||
|
One to five years
|
100 | 100 | 195 | 203 | ||||||||||||
|
Total held to maturity investment securities
|
$ | 9,595 | $ | 9,595 | $ | 11,657 | $ | 11,687 | ||||||||
The following table shows investments’ gross unrealized losses and fair value, 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, 2010 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
US Treasury and federal agencies
|
$ | 9,881 | $ | (119 | ) | $ | — | $ | — | $ | 9,881 | $ | (119 | ) | ||||||||||
|
State and municipal
|
60,401 | (2,370 | ) | 568 | (32 | ) | 60,969 | (2,402 | ) | |||||||||||||||
|
Federal agency collateralized mortgage obligations
|
21,130 | (214 | ) | — | — | 21,130 | (214 | ) | ||||||||||||||||
|
Federal agency mortgage-backed pools
|
27,033 | (360 | ) | 32 | — | 27,065 | (360 | ) | ||||||||||||||||
|
Corporate notes
|
26 | (6 | ) | — | — | 26 | (6 | ) | ||||||||||||||||
|
Total temporarily impaired securities
|
$ | 118,471 | $ | (3,069 | ) | $ | 600 | $ | (32 | ) | $ | 119,071 | $ | (3,101 | ) | |||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| December 31, 2009 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
State and municipal
|
$ | 14,757 | $ | (216 | ) | $ | 3,791 | $ | (197 | ) | $ | 18,548 | $ | (413 | ) | |||||||||
|
Federal agency collateralized mortgage obligations
|
8,835 | (22 | ) | — | — | 8,835 | (22 | ) | ||||||||||||||||
|
Federal agency mortgage-backed pools
|
— | — | 42 | — | 42 | — | ||||||||||||||||||
|
Private labeled mortgage-backed pools
|
3,534 | (100 | ) | 1,756 | (105 | ) | 5,290 | (205 | ) | |||||||||||||||
|
Corporate notes
|
9 | (13 | ) | — | — | 9 | (13 | ) | ||||||||||||||||
|
Total temporarily impaired securities
|
$ | 27,135 | $ | (351 | ) | $ | 5,589 | $ | (302 | ) | $ | 32,724 | $ | (653 | ) | |||||||||
70
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Information regarding security proceeds, gross gains and gross losses are presented below.
| December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Sales of securities available for sale
|
||||||||||||
|
Proceeds
|
$ | 85,892 | $ | 48,859 | $ | 30 | ||||||
|
Gross gains
|
675 | 1,130 | — | |||||||||
|
Gross losses
|
142 | 335 | 15 | |||||||||
The Company pledges securities to secure retail and corporate repurchase agreements. At December
31, 2010, the Company had pledged $160.3 million of fair value or $154.8 million of amortized cost,
in securities as collateral for $140.4 million in repurchase agreements.
Note 4
—
Loans
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Commercial
|
||||||||
|
Working capital and equipment
|
$ | 151,414 | $ | 167,149 | ||||
|
Real estate, including agriculture
|
167,785 | 135,639 | ||||||
|
Tax exempt
|
2,925 | 3,247 | ||||||
|
Other
|
7,894 | 8,482 | ||||||
|
Total
|
330,018 | 314,517 | ||||||
|
|
||||||||
|
Real estate
|
||||||||
|
1—4 family (including loans held for sale)
|
176,311 | 134,076 | ||||||
|
Other
|
4,957 | 5,519 | ||||||
|
Total
|
181,268 | 139,595 | ||||||
|
|
||||||||
|
Consumer
|
||||||||
|
Auto
|
136,014 | 146,270 | ||||||
|
Recreation
|
6,086 | 5,321 | ||||||
|
Real estate/home improvement
|
29,184 | 32,009 | ||||||
|
Home equity
|
90,580 | 83,412 | ||||||
|
Unsecured
|
3,091 | 2,222 | ||||||
|
Other
|
1,726 | 1,976 | ||||||
|
Total
|
266,681 | 271,210 | ||||||
|
|
||||||||
|
Mortgage warehouse
|
||||||||
|
Prime
|
123,743 | 166,698 | ||||||
|
Sub-prime
|
— | — | ||||||
|
Total
|
123,743 | 166,698 | ||||||
|
Total loans
|
901,710 | 892,020 | ||||||
|
Allowance for loan losses
|
(19,064 | ) | (16,015 | ) | ||||
|
Loans and loans held for sale, net
|
$ | 882,646 | $ | 876,005 | ||||
71
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| Loan | Deferred | Recorded | ||||||||||||||
| December 31, 2010 | Balance | Interest Due | Fees / (Costs) | Investment | ||||||||||||
|
Owner occupied real estate
|
$ | 125,883 | $ | 442 | $ | 26 | $ | 126,351 | ||||||||
|
Non owner occupied real estate
|
136,986 | 364 | 87 | 137,437 | ||||||||||||
|
Residential Spec Homes
|
2,257 | 4 | (2 | ) | 2,259 | |||||||||||
|
Development & Spec Land Loans
|
6,439 | 14 | — | 6,453 | ||||||||||||
|
Commercial and industrial
|
58,336 | 234 | 6 | 58,576 | ||||||||||||
|
Total commercial
|
329,901 | 1,058 | 117 | 331,076 | ||||||||||||
|
|
||||||||||||||||
|
Residential mortgage (includes HFS)
|
173,724 | 592 | 76 | 174,392 | ||||||||||||
|
Residential construction
|
7,467 | 13 | 1 | 7,481 | ||||||||||||
|
Mortgage warehouse
|
123,743 | 332 | — | 124,075 | ||||||||||||
|
Total real estate
|
304,934 | 937 | 77 | 305,948 | ||||||||||||
|
|
||||||||||||||||
|
Direct installment
|
23,527 | 97 | (338 | ) | 23,286 | |||||||||||
|
Direct Installment Purchased
|
1,869 | — | — | 1,869 | ||||||||||||
|
Indirect installment
|
128,122 | 491 | 7 | 128,620 | ||||||||||||
|
Home equity
|
114,202 | 563 | (708 | ) | 114,057 | |||||||||||
|
Total consumer
|
267,720 | 1,151 | (1,039 | ) | 267,832 | |||||||||||
|
|
||||||||||||||||
|
Total loans
|
902,555 | 3,146 | (845 | ) | 904,856 | |||||||||||
|
Allowance for loan losses
|
(19,064 | ) | — | — | (19,064 | ) | ||||||||||
|
Net loans
|
$ | 883,491 | $ | 3,146 | $ | (845 | ) | $ | 885,792 | |||||||
Loans to directors and executive officers of Horizon and the Bank, including associates of
such persons, amounted to $3.5 million and $14.7 million, as of December 31, 2010 and 2009. During
2010, new loans or advances were $919,000 and loan payments were $9.5 million.
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Balance at beginning of the period
|
$ | 16,015 | $ | 11,410 | $ | 9,791 | ||||||
|
Loans charged-off:
|
||||||||||||
|
Commercial and agricultural
|
3,856 | 2,461 | 1,358 | |||||||||
|
Real estate
|
811 | 432 | 351 | |||||||||
|
Consumer
|
5,068 | 7,354 | 5,277 | |||||||||
|
Total loans charged-off
|
9,735 | 10,247 | 6,986 | |||||||||
|
Recoveries of loans previously charged-off:
|
||||||||||||
|
Commercial and agricultural
|
228 | 66 | 15 | |||||||||
|
Real estate
|
1 | — | 50 | |||||||||
|
Consumer
|
1,001 | 1,183 | 972 | |||||||||
|
Total loan recoveries
|
1,230 | 1,249 | 1,037 | |||||||||
|
Net loans charged-off
|
8,505 | 8,998 | 5,949 | |||||||||
|
Provision charged to operating
expense
|
11,554 | 13,603 | 7,568 | |||||||||
|
Balance at the end of the period
|
$ | 19,064 | $ | 16,015 | $ | 11,410 | ||||||
|
Ratio of net charge-offs to average
loans outstanding for the period
|
0.97 | % | 1.01 | % | 0.70 | % | ||||||
72
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 method as of December 31, 2010:
| Mortgage | ||||||||||||||||||||
| Commercial | Real Estate | Warehousing | Consumer | Total Allowance | ||||||||||||||||
|
Allowance For Loan Losses
|
||||||||||||||||||||
|
Ending allowance balance attributable to loans:
|
||||||||||||||||||||
|
Individually evaluated for impairment
|
$ | 1,457 | $ | — | $ | — | $ | — | $ | 1,457 | ||||||||||
|
Collectively evaluated for impairment
|
6,097 | 2,379 | 1,435 | 7,696 | 17,607 | |||||||||||||||
|
Acquired with deteriorated credit quality
|
— | — | — | — | — | |||||||||||||||
|
Total ending allowance balance
|
$ | 7,554 | $ | 2,379 | $ | 1,435 | $ | 7,696 | $ | 19,064 | ||||||||||
|
|
||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Individually evaluated for impairment
|
$ | 8,123 | $ | — | $ | — | $ | — | $ | 8,123 | ||||||||||
|
Collectively evaluated for impairment
|
322,953 | 181,873 | 124,075 | 267,832 | 896,733 | |||||||||||||||
|
Acquired with deteriorated credit quality
|
— | — | — | — | — | |||||||||||||||
|
Total ending loans balance
|
$ | 331,076 | $ | 181,873 | $ | 124,075 | $ | 267,832 | $ | 904,856 | ||||||||||
The following table shows non-performing loans including loans more than 90 days past due, on
non-accrual, and troubled debt restructuring (“TDR’s”) along with other real estate owned and
repossessed collateral.
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Non-performing loans
|
||||||||
|
Commercial
|
||||||||
|
More than 90 days past due
|
$ | — | $ | 1,086 | ||||
|
Non-accrual
|
7,508 | 8,143 | ||||||
|
Trouble debt restructuring — accruing
|
574 | — | ||||||
|
Trouble debt restructuring — non-accrual
|
— | — | ||||||
|
Real estate
|
||||||||
|
More than 90 days past due
|
222 | 296 | ||||||
|
Non-accrual
|
5,483 | 1,257 | ||||||
|
Trouble debt restructuring — accruing
|
3,380 | 3,266 | ||||||
|
Trouble debt restructuring — non-accrual
|
241 | — | ||||||
|
Mortgage warehouse
|
||||||||
|
More than 90 days past due
|
— | — | ||||||
|
Non-accrual
|
— | — | ||||||
|
Trouble debt restructuring — accruing
|
— | — | ||||||
|
Trouble debt restructuring — non-accrual
|
— | — | ||||||
|
Consumer
|
||||||||
|
More than 90 days past due
|
136 | 376 | ||||||
|
Non-accrual
|
3,682 | 2,515 | ||||||
|
Trouble debt restructuring — accruing
|
165 | 206 | ||||||
|
Trouble debt restructuring — non-accrual
|
37 | — | ||||||
|
Total non-performing loans
|
21,428 | 17,145 | ||||||
|
Other real estate owned and repossessed
collateral
|
||||||||
|
Commercial
|
1,622 | 544 | ||||||
|
Real estate
|
1,042 | 1,186 | ||||||
|
Mortgage warehouse
|
— | — | ||||||
|
Consumer
|
— | 23 | ||||||
|
Total other real estate owned and
repossessed collateral
|
2,664 | 1,753 | ||||||
|
Total non-performing assets
|
$ | 24,092 | $ | 18,898 | ||||
73
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The Company’s TDR’s are considered impaired loans and included in the allowance methodology
using the guidance for impaired loans. At December 31, 2010 the type of concessions the Company has
made on restructured loans has been temporary rate reductions and reductions in monthly payments.
Any modification to a loan that is a concession and is not in the normal course of lending is
considered a restructured loan. A restructured loan is returned to accruing status after six
consecutive payments but is still reported as TDR unless the loan bears interest at a market rate.
As of December 31, 2010, the Company had $4.4 million in TDR’s and $4.1 million were performing
according to the restructured terms. The Company experienced one TDR default during 2010.
Loans for which it is probable that the Company will not collect all principal and interest due
according to contractual terms, including TDR’s, are measured for impairment. Allowable methods for
determining the amount of impairment include estimating fair value using the fair value of the
collateral for collateral-dependent loans.
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. The following table shows the
Company’s impaired loans.
| Carrying | Average | Specific | Interest | |||||||||||||
| Impaired loans | Value | Balance | Reserves | Collected | ||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
Commercial
|
$ | 8,082 | $ | 8,075 | $ | 1,457 | $ | 200 | ||||||||
|
Real estate
|
3,396 | 3,376 | 65 | 127 | ||||||||||||
|
Mortgage warehouse
|
— | — | — | — | ||||||||||||
|
Consumer
|
202 | 202 | 37 | 7 | ||||||||||||
|
Total
|
$ | 11,680 | $ | 11,653 | $ | 1,559 | $ | 334 | ||||||||
|
December 31, 2009
|
||||||||||||||||
|
Commercial
|
$ | 9,685 | $ | 11,647 | $ | 1,675 | $ | 389 | ||||||||
|
Real estate
|
3,472 | 2,481 | 84 | 184 | ||||||||||||
|
Mortgage warehouse
|
— | — | — | — | ||||||||||||
|
Consumer
|
206 | 159 | — | 15 | ||||||||||||
|
Total
|
$ | 13,363 | $ | 14,287 | $ | 1,759 | $ | 588 | ||||||||
|
December 31, 2008
|
||||||||||||||||
|
Commercial
|
$ | 5,118 | $ | 3,083 | $ | 1,122 | $ | 286 | ||||||||
|
Real estate
|
— | — | — | — | ||||||||||||
|
Mortgage warehouse
|
— | — | — | — | ||||||||||||
|
Consumer
|
— | — | — | — | ||||||||||||
|
Total
|
$ | 5,118 | $ | 3,083 | $ | 1,122 | $ | 286 | ||||||||
There were $1.8 million, $4.8 million, and $1.4 of impaired loans without a specific reserve
in 2010, 2009, or 2008. Interest income not recognized on the non-performing loans totaled
approximately
$744,000, $712,000, and $283,000 in 2010, 2009, and 2008. Accrued interest on impaired loans is
reversed from interest income when a loan is determined to be impaired and is a non-accrual loan.
74
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 as of December 31, 2010:
| Allowance | ||||||||||||
| Unpaid | For Loan | |||||||||||
| Principal | Recorded | Loss | ||||||||||
| Balance | Investment | Allocated | ||||||||||
|
With no recorded allowance
|
||||||||||||
|
Commercial
|
||||||||||||
|
Owner occupied real estate
|
$ | 720 | $ | 721 | $ | — | ||||||
|
Non owner occupied real estate
|
928 | 929 | — | |||||||||
|
Residential development
|
— | — | — | |||||||||
|
Development & Spec Land Loans
|
— | — | — | |||||||||
|
Commercial and industrial
|
118 | 118 | — | |||||||||
|
Total commercial
|
1,766 | 1,768 | — | |||||||||
|
|
||||||||||||
|
With an allowance recorded
|
||||||||||||
|
Commercial
|
||||||||||||
|
Owner occupied real estate
|
639 | 640 | 385 | |||||||||
|
Non owner occupied real estate
|
4,932 | 4,970 | 665 | |||||||||
|
Residential development
|
16 | 16 | 16 | |||||||||
|
Development & Spec Land Loans
|
250 | 250 | 126 | |||||||||
|
Commercial and industrial
|
479 | 479 | 265 | |||||||||
|
Total commercial
|
6,316 | 6,355 | 1,457 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 8,082 | $ | 8,123 | $ | 1,457 | ||||||
The following table presents the nonaccrual and loans past due over 90 days still on accrual
by class of loans as of December 31, 2010:
| Loans Past | ||||||||||||
| Due Over 90 | ||||||||||||
| Days Still | ||||||||||||
| Nonaccrual | Accruing | TDR’s | ||||||||||
|
Commercial
|
||||||||||||
|
Owner occupied real estate
|
$ | 1,358 | $ | — | $ | — | ||||||
|
Non owner occupied real estate
|
5,439 | — | 421 | |||||||||
|
Residential development
|
16 | — | — | |||||||||
|
Development & Spec Land Loans
|
250 | — | — | |||||||||
|
Commercial and industrial
|
445 | — | 153 | |||||||||
|
Total commercial
|
7,508 | — | 574 | |||||||||
|
|
||||||||||||
|
Real estate
|
||||||||||||
|
Residential mortgage
|
5,278 | 222 | 3,621 | |||||||||
|
Residential construction
|
205 | — | — | |||||||||
|
Mortgage warehouse
|
— | — | — | |||||||||
|
Total real estate
|
5,483 | 222 | 3,621 | |||||||||
|
|
||||||||||||
|
Consumer
|
||||||||||||
|
Direct Installment
|
251 | 23 | — | |||||||||
|
Direct Installment Purchased
|
— | 5 | — | |||||||||
|
Indirect Installment
|
1,328 | 98 | — | |||||||||
|
Home Equity
|
2,102 | 10 | 202 | |||||||||
|
Total Consumer
|
3,682 | 136 | 202 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 16,673 | $ | 358 | $ | 4,397 | ||||||
75
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| 30 - 59 Days | 60 - 89 Days | Greater than 90 | Loans Not Past | |||||||||||||||||||||
| Past Due | Past Due | Days Past Due | Total Past Due | Due | Total | |||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Owner occupied real estate
|
$ | 229 | $ | — | $ | — | $ | 229 | $ | 125,654 | $ | 125,883 | ||||||||||||
|
Non owner occupied real estate
|
461 | — | — | 461 | 136,525 | 136,986 | ||||||||||||||||||
|
Residential development
|
— | — | — | — | 2,257 | 2,257 | ||||||||||||||||||
|
Development & Spec Land Loans
|
— | — | — | — | 6,439 | 6,439 | ||||||||||||||||||
|
Commercial and industrial
|
74 | — | — | 74 | 58,262 | 58,336 | ||||||||||||||||||
|
Total commercial
|
764 | — | — | 764 | 329,137 | 329,901 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Real estate
|
||||||||||||||||||||||||
|
Residential mortgage
|
317 | 91 | 222 | 630 | 173,094 | 173,724 | ||||||||||||||||||
|
Residential construction
|
293 | — | — | 293 | 7,174 | 7,467 | ||||||||||||||||||
|
Mortgage warehouse
|
— | — | — | — | 123,743 | 123,743 | ||||||||||||||||||
|
Total real estate
|
610 | 91 | 222 | 923 | 304,011 | 304,934 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Direct Installment
|
294 | 156 | 23 | 473 | 23,054 | 23,527 | ||||||||||||||||||
|
Direct Installment Purchased
|
51 | 31 | 5 | 87 | 1,782 | 1,869 | ||||||||||||||||||
|
Indirect Installment
|
2,360 | 433 | 98 | 2,891 | 125,231 | 128,122 | ||||||||||||||||||
|
Home Equity
|
899 | 218 | 10 | 1,127 | 113,075 | 114,202 | ||||||||||||||||||
|
Total consumer
|
3,604 | 838 | 136 | 4,578 | 263,142 | 267,720 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 4,978 | $ | 929 | $ | 358 | $ | 6,265 | $ | 896,290 | $ | 902,555 | ||||||||||||
Horizon Bank’s processes for determining credit quality differ slightly depending on whether a
new loan or a renewed loan is being underwritten, or whether an existing loan is re-evaluated for
credit quality. The latter usually occurs upon receipt of current financial information or other
pertinent data that would trigger a change in the loan grade.
| • | For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO). | |
| • | Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the COO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are expected to notify the COO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the COO, however, lenders must present their factual information to either the Loan Committee or the COO when recommending an upgrade. One of the requirements for meeting the annual bonus criteria is for a loan officer to avoid having any of his/her loans downgraded by either Internal Loan Review or Bank Regulators to a classified grade; that is, substandard, doubtful or loss. | |
| • | The COO meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. | |
| • | Monthly, Senior Management attends the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, and collateral repossessions. The information reviewed in this meeting acts as a precursor for developing Management’s analysis of the adequacy of the Allowance for Loan and Lease Losses. |
For real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that
are 90 days or more past due, on non-accrual, or a troubled debt restructure are graded
Substandard. After 90 days delinquent a loan is charged off unless it is well secured and in
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.
76
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Horizon Bank employs an eight-grade rating system to determine the credit quality of
commercial loans. The first four grades represent acceptable quality, and the last four grades
mirror the criticized and classified grades used by the bank regulatory agencies (special mention,
substandard, doubtful, and loss). The loan grade definitions are detailed below.
Risk Grade 1: Excellent (Pass)
| Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long term debt rating of A or better. |
Risk Grade 2: Good (Pass)
| Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; 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 (Pass)
| Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization. |
Risk Grade 5: Special Mention
| Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” |
77
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| 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. |
78
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Owner occupied real estate
|
$ | 94,722 | $ | 13,656 | $ | 17,506 | $ | — | $ | 125,883 | ||||||||||
|
Non owner occupied real estate
|
119,041 | 6,107 | 11,838 | — | 136,986 | |||||||||||||||
|
Residential development
|
834 | 537 | 886 | — | 2,257 | |||||||||||||||
|
Development & Spec Land Loans
|
4,378 | 746 | 1,315 | — | 6,439 | |||||||||||||||
|
Commercial and industrial
|
45,831 | 6,856 | 5,649 | — | 58,336 | |||||||||||||||
|
Total commercial
|
264,805 | 27,902 | 37,195 | — | 329,901 | |||||||||||||||
|
|
||||||||||||||||||||
|
Real estate
|
||||||||||||||||||||
|
Residential mortgage
|
164,603 | — | 9,121 | — | 173,724 | |||||||||||||||
|
Residential construction
|
7,262 | — | 205 | — | 7,467 | |||||||||||||||
|
Mortgage warehouse
|
123,743 | — | — | — | 123,743 | |||||||||||||||
|
Total real estate
|
295,608 | — | 9,326 | — | 304,934 | |||||||||||||||
|
|
||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||
|
Direct Installment
|
23,253 | — | 274 | — | 23,527 | |||||||||||||||
|
Direct Installment Purchased
|
1,864 | — | 5 | — | 1,869 | |||||||||||||||
|
Indirect Installment
|
126,696 | — | 1,426 | — | 128,122 | |||||||||||||||
|
Home Equity
|
111,888 | — | 2,314 | — | 114,202 | |||||||||||||||
|
Total Consumer
|
263,701 | — | 4,019 | — | 267,720 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 824,114 | $ | 27,902 | $ | 50,539 | $ | — | $ | 902,555 | ||||||||||
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Land
|
$ | 11,184 | $ | 9,202 | ||||
|
Buildings and improvements
|
32,645 | 30,271 | ||||||
|
Furniture and equipment
|
10,353 | 12,504 | ||||||
|
Total cost
|
54,182 | 51,977 | ||||||
|
Accumulated depreciation
|
(19,988 | ) | (21,443 | ) | ||||
|
Net premise and equipment
|
$ | 34,194 | $ | 30,534 | ||||
Loans serviced for others are not included in the accompanying consolidated balance sheets.
The unpaid principal balances of loans serviced for others totaled approximately $463.5 million and
$313.3 million at December 31, 2010 and 2009.
The aggregate fair value of capitalized mortgage servicing rights was approximately $3.7 million,
$3.5 million, and $1.2 million at December 31, 2010, 2009, and 2008. 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.
79
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Mortgage servicing rights
|
||||||||||||
|
Balances, January 1
|
$ | 3,010 | $ | 732 | $ | 276 | ||||||
|
Servicing rights capitalized
|
2,000 | 2,807 | 634 | |||||||||
|
Amortization of servicing
rights
|
(835 | ) | (529 | ) | (178 | ) | ||||||
|
|
4,175 | 3,010 | 732 | |||||||||
|
Impairment allowance
|
(803 | ) | (139 | ) | (4 | ) | ||||||
|
Balances, December 31
|
$ | 3,372 | $ | 2,871 | $ | 728 | ||||||
During 2008, the Bank recorded a recovery of the impairment allowance totaling approximately
$3,000. During 2010 and 2009, the Bank recorded additional impairment of approximately $664,000
and $135,000.
As a result of the acquisition of Alliance Bank Corporation in 2005 and American Trust &
Savings Bank in 2010, the Company has recorded certain amortizable intangible assets related to
core deposit intangibles. The Core deposit intangible is being amortized over ten years using an
accelerated method. Amortizable intangible assets are summarized as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
|
Amortizable intangible
assets
|
||||||||||||||||
|
Core deposit intangible
|
$ | 4,637 | $ | (1,896 | ) | $ | 2,952 | $ | (1,505 | ) | ||||||
Amortization expense for intangible assets totaled $390,000, $305,000, and $317,000 for the
years ended December 31, 2010, 2009, and 2008. Estimated amortization for the years ending
December 31 are as follows:
|
2011
|
$ | 449 | ||
|
2012
|
438 | |||
|
2013
|
427 | |||
|
2014
|
416 | |||
|
2015
|
267 | |||
|
Thereafter
|
744 | |||
|
|
||||
|
|
$ | 2,741 | ||
|
|
||||
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Noninterest-bearing demand deposits
|
$ | 107,606 | $ | 84,357 | ||||
|
Interest-bearing demand deposits
|
345,288 | 395,179 | ||||||
|
Money market (variable rate)
|
86,859 | 79,831 | ||||||
|
Savings deposits
|
76,806 | 35,638 | ||||||
|
Certificates of deposit of $100,000
or more
|
206,130 | 186,236 | ||||||
|
Other certificates and time deposits
|
162,809 | 170,467 | ||||||
|
Total deposits
|
$ | 985,498 | $ | 951,708 | ||||
80
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 | |||||||
|
2011
|
$ | 163,319 | $ | 20,414 | ||||
|
2012
|
39,647 | 23,500 | ||||||
|
2013
|
25,324 | 17,628 | ||||||
|
2014
|
4,606 | 10,729 | ||||||
|
2015
|
7,514 | 10,923 | ||||||
|
Thereafter
|
35,295 | 10,039 | ||||||
|
|
$ | 275,706 | $ | 93,233 | ||||
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Federal Home Loan Bank advances, variable and fixed rates
ranging from
1.58% to 7.53%, due at various dates through November 15, 2024
|
$ | 88,847 | $ | 142,780 | ||||
|
Securities sold under agreements to repurchase
|
140,394 | 141,236 | ||||||
|
Federal funds purchased
|
31,500 | — | ||||||
|
Total borrowings
|
$ | 260,741 | $ | 284,016 | ||||
The Federal Home Loan Bank advances are secured by first and second mortgage loans and
mortgage warehouse loans totaling approximately $265.3 million. Advances are subject to
restrictions or penalties in the event of prepayment. In addition, a $15.0 million advance
outstanding at December 31, 2010 that matures on April 29, 2013, contained an option whereby the
interest rate may be adjusted quarterly by the Federal Home Loan Bank, at which time the advances
may be repaid at the option of the Company without penalty.
Securities sold under agreements to repurchase consist of obligations of the Bank to other parties.
The obligations are secured by U.S. agency and mortgage-backed securities and such collateral is
held in safekeeping by third parties. The maximum amount of outstanding agreements at any month
end during 2010 and 2009 totaled $144.7 million and $149.1 million and the daily average of such
agreements totaled $138.6 million and $131.8 million. The agreements at December 31, 2010, mature
at various dates through September 13, 2020.
At December 31, 2010, the Bank has available approximately $383.6 million in credit lines with
various money center banks, including the FHLB.
Contractual maturities in years ending December 31:
|
2011
|
$ | 76,478 | ||
|
2012
|
812 | |||
|
2013
|
14,518 | |||
|
2014
|
20,195 | |||
|
2015
|
20,463 | |||
|
Thereafter
|
128,275 | |||
|
|
||||
|
|
$ | 260,741 | ||
|
|
||||
81
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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% and mature on
October 21, 2034, and are non-callable for five years. After that period, the 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% and
mature on January 30, 2037, and are non-callable for five years. After that period, the 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 proceeds of this issue were used to redeem the securities issued by Trust I on
March 26, 2007.
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 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%, mature in June 2034, and are non-callable for five years. After that
period, the 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 $3.6 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%,
mature in March 2034, and are non-callable for five years. After that period, the securities may
be called at any quarterly interest payment date at par.
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.
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
82
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
discretionary accounts of active employees will remain in the new ESOP. The Matching
contribution accounts under the Stock Bonus Plan will be transferred to the Horizon Bancorp
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 their 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 $245,000 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$400,000 in 2010 and $300,000 in 2009
and 2008.
The ESOP, which is not leveraged, owns a total of 394,483 shares of Horizon’s stock or 12.0% of the
outstanding shares.
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 and Horizon’s discretionary contributions vest over a six-year period. The
Bank’s expense related to the thrift plan totaled approximately $459,000 in 2010, $439,000 in 2009,
and $348,000 in 2008.
The Thrift Plan owns a total of 128,493 shares of Horizon’s stock or 3.9% of the outstanding
shares.
83
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Income tax expense
|
||||||||||||
|
Currently payable
|
||||||||||||
|
Federal
|
$ | 3,018 | $ | 2,818 | $ | 2,404 | ||||||
|
State
|
37 | (35 | ) | (57 | ) | |||||||
|
Deferred
|
(113 | ) | (713 | ) | (485 | ) | ||||||
|
Total income tax expense
|
$ | 2,942 | $ | 2,070 | $ | 1,862 | ||||||
|
Reconciliation of federal statutory
to actual tax expense
|
||||||||||||
|
Federal statutory income tax at 34%
|
$ | 4,555 | $ | 3,812 | $ | 3,683 | ||||||
|
Tax exempt interest
|
(1,453 | ) | (1,377 | ) | (1,182 | ) | ||||||
|
Tax exempt income
|
(273 | ) | (245 | ) | (496 | ) | ||||||
|
Nondeductible and other
|
81 | (120 | ) | (105 | ) | |||||||
|
Effect of state income taxes
|
32 | — | (38 | ) | ||||||||
|
Actual tax expense
|
$ | 2,942 | $ | 2,070 | $ | 1,862 | ||||||
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Allowance for loan losses
|
$ | 6,946 | $ | 5,849 | ||||
|
Director and employee benefits
|
1,371 | 1,057 | ||||||
|
Other
|
102 | 32 | ||||||
|
Total assets
|
8,419 | 6,938 | ||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Depreciation
|
(1,147 | ) | (1,241 | ) | ||||
|
Difference in expense recognition
|
(51 | ) | (148 | ) | ||||
|
Federal Home Loan Bank stock dividends
|
(298 | ) | (298 | ) | ||||
|
Difference in basis of intangible assets
|
(1,682 | ) | (1,547 | ) | ||||
|
FHLB Penalty
|
(1,417 | ) | — | |||||
|
Unrealized gain on securities available for sale
|
(1,746 | ) | (2,930 | ) | ||||
|
Other
|
(80 | ) | (73 | ) | ||||
|
Total liabilities
|
(6,421 | ) | (6,237 | ) | ||||
|
Net deferred tax asset
|
$ | 1,998 | $ | 701 | ||||
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 2007.
84
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Unrealized gains (losses) on securities:
|
||||||||||||
|
Unrealized holding gains (losses) arising during the period
|
$ | (2,850 | ) | $ | 7,348 | $ | 1,706 | |||||
|
Less: reclassification adjustment for gains realized in net income
|
533 | 795 | (15 | ) | ||||||||
|
|
(3,383 | ) | 6,553 | 1,721 | ||||||||
|
Unrealized gain (loss) on derivative instruments
|
(1,803 | ) | 1,279 | (851 | ) | |||||||
|
Net unrealized gains (losses)
|
(5,186 | ) | 7,832 | 870 | ||||||||
|
Tax expense (benefit)
|
1,815 | (2,741 | ) | (305 | ) | |||||||
|
Other comprehensive income (loss)
|
$ | (3,371 | ) | $ | 5,091 | $ | 565 | |||||
The components of accumulated other comprehensive income (loss) included in capital are as follows:
| December 31 | December 31 | December 31 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Unrealized gain on securities available for sale
|
$ | 4,989 | $ | 8,371 | $ | 1,817 | ||||||
|
Unrealized gain (loss) on derivative instruments
|
(1,377 | ) | 428 | (851 | ) | |||||||
|
Tax effect
|
(1,264 | ) | (3,079 | ) | (338 | ) | ||||||
|
Total accumulated other comprehensive income
|
$ | 2,348 | $ | 5,719 | $ | 628 | ||||||
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 $4.3 million of cash on hand or on deposit with the
Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31,
2010. 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, 2010 and 2009, commitments to make loans amounted to approximately $252.4 million
and $189.5 million and commitments under outstanding standby letters of credit amounted to
approximately $1.1 million and $1.5 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.
Horizon and the Bank are subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The assigned capital category
is largely determined by three ratios that are calculated according to the regulations: total risk
adjusted capital, Tier I capital and Tier I leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and off-balance sheet
exposures of the entity.
85
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The capital category assigned to an entity can also be affected by qualitative judgments made
by regulatory agencies about the risk inherent in the entity’s activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well capitalized to
critically undercapitalized. Classification of a bank in any of the undercapitalized categories
can result in actions by regulators that could have a material effect on a bank’s operations. At
December 31, 2010 and 2009, Horizon and the Bank are categorized as well capitalized and met all
subject capital adequacy requirements.
| For Capital 1 | For Well 1 | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Capitalized Purposes | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
As of December 31, 2010
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total capital
1
(to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 144,941 | 15.07 | % | $ | 76,943 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Bank
|
133,893 | 13.96 | % | 76,730 | 8.00 | % | $ | 95,912 | 10.00 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital
1
(to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
132,860 | 13.81 | % | 38,482 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
121,812 | 12.70 | % | 38,366 | 4.00 | % | 57,549 | 6.00 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital
1
(to average assets)
|
||||||||||||||||||||||||
|
Consolidated
|
132,860 | 9.37 | % | 56,717 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
121,812 | 8.60 | % | 56,657 | 4.00 | % | 70,821 | 5.00 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
As of December 31, 2009
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total capital1 (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 142,122 | 14.74 | % | $ | 77,135 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Bank
|
126,005 | 13.10 | % | 76,950 | 8.00 | % | $ | 96,187 | 10.00 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital1 (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
130,052 | 13.49 | % | 38,562 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
113,935 | 11.85 | % | 38,459 | 4.00 | % | 57,689 | 6.00 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Tier 1 capital1 (to average assets)
|
||||||||||||||||||||||||
|
Consolidated
|
130,052 | 9.86 | % | 52,759 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
113,935 | 8.64 | % | 52,748 | 4.00 | % | 65,935 | 5.00 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
| 1 | As defined by regulatory agencies |
Under Horizon’s 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan), Horizon may
grant certain officers and employees stock option awards or stock appreciation rights which vest
and become fully exercisable at the end of five years of continued employment. SARs entitle
eligible employees to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock covered by the
option over the option exercise price. The underlying stock options are deemed to have been
cancelled upon exercise of the SARs.
A summary of option activity under the 1997 Plan as of December 31, 2010 and changes during the
year then ended, is presented below:
86
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| Weighted- | ||||||||||||||||
| Weighted- | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Shares | Exercise Price | Term | Value | |||||||||||||
|
Outstanding, beginning of year
|
18,250 | $ | 7.68 | |||||||||||||
|
Exercised
|
(16,450 | ) | 6.56 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, end of year
|
1,800 | 17.93 | 2.00 | $ | 15,612 | |||||||||||
|
|
||||||||||||||||
|
Exercisable, end of year
|
1,800 | 17.93 | 2.00 | 15,612 | ||||||||||||
There were no options granted during the years 2010, 2009, and 2008. The total intrinsic
value of options exercised during the years ended December 31, 2010, 2009, and 2008, was $210,000,
$61,000 and $23,000.
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 may issue up to 150,000 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
limits the number of shares available to 150,000 for incentive stock options and to 75,000 for the
grant of non-option awards. The shares available for issuance under the 2003 Plan may be divided
among the various types of awards and among the participants as the Compensation Committee
(Committee) determines. The Committee is authorized to grant any type of award to a participant
that is consistent with the provisions of the 2003 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 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 of 20% per year. 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 was approved by stockholders on May 6, 2010, an amendment to the 2003
Omnibus Equity Incentive Plan making an additional 175,000 Common Shares available for issuance.
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 (there were no options granted during 2009 or
2008 under the 2003 plan):
| December 31 | 2010 | |||
|
Dividend yields
|
2.99 | % | ||
|
Volatility factors of expected
market price of common stock
|
30.97 | % | ||
|
Risk-free interest rates
|
2.86 | % | ||
|
Expected life of options
|
8 years | |||
87
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
A summary of option activity under the 2003 Plan as of December 31, 2010, and changes during
the year then ended, is presented below:
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | Aggregate | ||||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Shares | Exercise Price | Term | Value | |||||||||||||
|
Outstanding, beginning of year
|
29,000 | $ | 25.28 | |||||||||||||
|
Granted
|
20,000 | 22.40 | ||||||||||||||
|
Forfeited
|
(2,000 | ) | 23.56 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, end of year
|
47,000 | 24.13 | 6.78 | $ | 116,080 | |||||||||||
|
|
||||||||||||||||
|
Exercisable, end of year
|
43,000 | 23.86 | 6.86 | 112,080 | ||||||||||||
The weighted average grant-date fair value of options granted during the year 2010 was $5.91.
No options were granted under the 2003 Plan during 2009 and 2008. No options granted under the
2003 Plan were exercised in 2010, 2009, or 2008.
A summary of the status of Horizon’s non-vested, restricted shares as of December 31, 2010 is
presented below:
| 2010 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
|
Non-vested beginning of year
|
10,000 | $ | 27.22 | |||||
|
Granted
|
8,329 | 19.35 | ||||||
|
|
||||||||
|
Non-vested, end of year
|
18,329 | 23.64 | ||||||
|
|
||||||||
Grants vest at the end of four or five years of continuous employment.
Total compensation cost recognized in the income statement for option-based payment arrangements
during 2010 was $30,000 and the related tax benefit recognized was $12,000. Total compensation
cost recognized in the income statement for option-based payment arrangements during 2009 and 2008
was $39,000 and the related tax benefit recognized was $15,000, respectively.
Total compensation cost recognized in the income statement for restricted share based payment
arrangements during 2010, 2009, and 2008 was $68,000, $164,000, and $233,000. The recognized tax
benefit related thereto was $27,000, $66,000, and $92,000 for the years ended December 31, 2010,
2009, and 2008.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2010, 2009, and 2008 was $120,000, $68,000, and $35,000. The actual tax benefit
realized for the tax deductions from option exercise of the share-based payment arrangements
totaled $77,000, $18,000, and $8,000, for the years ended December 31, 2010, 2009 and 2008.
As of December 31, 2010, there was $19,000 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 0.3 years.
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 20 — Derivative Financial Instruments
Cash Flow Hedges
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow
due to interest rate fluctuations, the Company entered into interest rate swap agreements for a
portion of its floating rate debt. The agreements provide for the Company to receive interest from
the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average
fixed rate of 5.63% on a notional amount of $30.6 million at December 31, 2010 and $27.0 million at
December 31, 2009. 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, 2010 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, 2010 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 $48.0 million at December 31, 2010 and $30.1 million at December 31,
2009.
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, 2010 the Company’s fair value of these derivatives were recorded
and over the next 12 months are not expected to have a significant impact on the Company’s net
income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage
loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.
89
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following tables summarize the fair value of derivative financial instruments utilized by
Horizon Bancorp:
| Asset Derivative | Liability Derivatives | |||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||
| Balance Sheet | Balance Sheet | |||||||||||||||
| Derivatives designated as hedging instruments | Location | Fair Value | Location | Fair Value | ||||||||||||
|
Interest rate contracts
|
Loans | $ | 1,388 | Other liabilities | $ | 2,039 | ||||||||||
|
Interest rate contracts
|
Other Assets | 651 | Other liabilities | 1,376 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives
designated as hedging
instruments
|
2,039 | 3,415 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivatives not
designated as hedging
instruments
|
||||||||||||||||
|
Mortgage loan contracts
|
Other assets | 407 | Other liabilities | — | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives not
designated as hedging
instruments
|
407 | — | ||||||||||||||
|
|
||||||||||||||||
|
Total derivatives
|
$ | 2,446 | $ | 3,415 | ||||||||||||
|
|
||||||||||||||||
| Asset Derivative | Liability Derivatives | |||||||||||||||
| December 31, 2009 | December 31, 2009 | |||||||||||||||
| Balance Sheet | Balance Sheet | |||||||||||||||
| Derivatives designated as hedging instruments | Location | Fair Value | Location | Fair Value | ||||||||||||
|
Interest rate contracts
|
Loans | $ | 1,141 | Other liabilities | $ | 1,141 | ||||||||||
|
Interest rate contracts
|
Other Assets | 1,038 | Other liabilities | 611 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives
designated as hedging
instruments
|
2,179 | 1,752 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivatives not
designated as hedging
instruments
|
||||||||||||||||
|
Mortgage loan contracts
|
Other assets | 265 | Other liabilities | 135 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives not
designated as hedging
instruments
|
265 | 135 | ||||||||||||||
|
|
||||||||||||||||
|
Total derivatives
|
$ | 2,444 | $ | 1,887 | ||||||||||||
|
|
||||||||||||||||
The effect of the derivative instruments on the consolidated statement of income for the
twelve month periods ended is as follows:
| Amount of Loss Recognized in Other Comprehensive | ||||||||||||
| Income on Derivative (Effective Portion) | ||||||||||||
| Twelve Months Ended December 31 | ||||||||||||
| Derivative in cash flow hedging relationship | 2010 | 2009 | 2008 | |||||||||
|
Interest rate contracts
|
$ | (1,172 | ) | $ | 831 | $ | 553 | |||||
FASB Accounting Standards Codification (“ASC”) Topic 820-10-20 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Topic 820-10-55 establishes a fair value
hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs
when measuring fair value.
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
| Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||
| Derivative in fair value | Location of gain (loss) | Twelve Months Ended December 31 | ||||||||||||||
| hedging relationship | recognized on derivative | 2010 | 2009 | 2008 | ||||||||||||
|
Interest rate contracts
|
Interest income - loans | $ | 898 | $ | (565 | ) | $ | 1,706 | ||||||||
|
Interest rate contracts
|
Interest income - loans | (898 | ) | 565 | (1,706 | ) | ||||||||||
|
Total
|
$ | — | $ | — | $ | — | ||||||||||
| Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||
| Derivative not designated | Location of gain (loss) | Twelve Months Ended December 31 | ||||||||||||||
| as hedging relationship | recognized on derivative | 2010 | 2009 | 2008 | ||||||||||||
|
Mortgage contracts
|
Other income - gain on sale of loans | $ | (538 | ) | $ | (101 | ) | $ | (231 | ) | ||||||
|
Total
|
$ | (538 | ) | $ | (101 | ) | $ | (231 | ) | |||||||
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 |
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying financial statements, as well as the
general classification of such instruments pursuant to the valuation hierarchy.
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, Treasury and federal agency securities, state
and municipal securities, federal agency mortgage obligations and mortgage-backed pools, and
corporate notes. Level 2 securities are valued by a third party pricing service commonly used in
the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market
spreads, cash flow analysis, the Treasury yield curve, trade execution data, market consensus
prepayment spreads and available credit information and the bond’s terms and conditions. The
pricing provider utilizes evaluated pricing models that vary based on asset class. These models
incorporate available market information including quoted prices of securities with similar
characteristics and, because many fixed-income securities do not trade on a daily basis, apply
available information through processes such as benchmark curves, benchmarking of like securities,
sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted
spread model is used to develop prepayment and interest rate scenarios for securities with
prepayment features.
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
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 through entering into interest
rate swap agreements. Fair value of those fixed rate loans is based on discounting estimated cash
flows using interest rates determined by a respective interest rate swap agreement. Loans are
classified within Level 3 of the valuation hierarchy based on the unobservable inputs used.
Interest rate swap agreements
The fair value is estimated by a third party using inputs that are primarily unobservable and
cannot be corroborated by observable market data and, therefore, are classified within Level 3 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:
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
Available-for-sale securities
|
||||||||||||||||
|
U.S. Treasury and federal agencies
|
$ | 25,251 | $ | — | $ | 25,251 | $ | — | ||||||||
|
State and municipal
|
131,489 | — | 131,489 | — | ||||||||||||
|
Federal agency collateralized
mortgage obligations
|
101,837 | — | 101,837 | — | ||||||||||||
|
Federal agency mortgage-backed pools
|
117,895 | — | 117,895 | — | ||||||||||||
|
Private labeled mortgage-backed pools
|
5,323 | — | 5,323 | — | ||||||||||||
|
Corporate notes
|
549 | 456 | 20 | — | ||||||||||||
|
Total available-for-sale securities
|
382,344 | 456 | 381,815 | — | ||||||||||||
|
|
||||||||||||||||
|
Hedged loans
|
50,088 | — | — | 50,088 | ||||||||||||
|
Forward sale commitments
|
407 | — | — | 407 | ||||||||||||
|
Interest rate swap agreements
|
(3,415 | ) | — | — | (3,415 | ) | ||||||||||
|
Commitments to originate loans
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Available-for-sale securities
|
||||||||||||||||
|
U.S. Treasury and federal agencies
|
$ | 20,085 | $ | — | $ | 20,085 | $ | — | ||||||||
|
State and municipal
|
109,149 | — | 109,149 | — | ||||||||||||
|
Federal agency collateralized
mortgage obligations
|
77,289 | — | 77,289 | — | ||||||||||||
|
Federal agency mortgage-backed pools
|
118,661 | — | 118,661 | — | ||||||||||||
|
Private labeled mortgage-backed pools
|
7,606 | 7,606 | ||||||||||||||
|
Corporate notes
|
342 | 323 | 19 | — | ||||||||||||
|
Total available-for-sale securities
|
333,132 | 323 | 332,809 | — | ||||||||||||
|
|
||||||||||||||||
|
Hedged loans
|
31,153 | — | — | 31,153 | ||||||||||||
|
Forward sale commitments
|
265 | — | — | 265 | ||||||||||||
|
Interest rate swap agreements
|
(715 | ) | — | — | (715 | ) | ||||||||||
|
Commitments to originate loans
|
(135 | ) | — | — | (135 | ) | ||||||||||
92
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following is a reconciliation of the beginning and ending balances of recurring fair value
measurements recognized in the accompanying consolidated balance sheet using significant
unobservable (level 3) inputs:
| Forward Sale | Commitments to | |||||||||||||||
| Hedged Loans | Commitments | Interest Rate Swaps | Originate Loans | |||||||||||||
|
Beginning
balance December 31, 2009
|
$ | 31,153 | $ | 265 | $ | (715 | ) | $ | (135 | ) | ||||||
|
Total realized and unrealized gains and losses
|
||||||||||||||||
|
Included in net income
|
898 | 142 | (898 | ) | 135 | |||||||||||
|
Included in other comprehensive income, gross
|
— | — | (1,802 | ) | — | |||||||||||
|
Purchases, issuances, and settlements
|
19,167 | — | — | — | ||||||||||||
|
Principal payments
|
(1,130 | ) | — | — | — | |||||||||||
|
Ending
balance December 31, 2010
|
$ | 50,088 | $ | 407 | $ | (3,415 | ) | $ | — | |||||||
| Forward Sale | Commitments to | |||||||||||||||
| Hedged Loans | Commitments | Interest Rate Swaps | Originate Loans | |||||||||||||
|
Beginning balance December 31, 2008
|
$ | 25,033 | $ | 670 | $ | (2,557 | ) | $ | (438 | ) | ||||||
|
Total realized and unrealized gains and losses
|
||||||||||||||||
|
Included in net income
|
(565 | ) | (405 | ) | 565 | 303 | ||||||||||
|
Included in other comprehensive income, gross
|
— | — | 240 | — | ||||||||||||
|
Purchases, issuances, and settlements
|
7,489 | — | 1,037 | — | ||||||||||||
|
Principal payments
|
(804 | ) | — | — | — | |||||||||||
|
Ending balance December 31, 2009
|
$ | 31,153 | $ | 265 | $ | (715 | ) | $ | (135 | ) | ||||||
Realized gains and losses included in net income for the periods are reported in the
consolidated statements of income as follows:
| Year Ended December 31 | ||||||||||||
| Non Interest Income | 2010 | 2009 | 2008 | |||||||||
|
Total gains and losses from:
|
||||||||||||
|
Hedged loans
|
$ | (875 | ) | $ | (565 | ) | $ | 1,706 | ||||
|
Fair value interest rate swap
agreements
|
875 | 565 | (1,706 | ) | ||||||||
|
Derivative loan commitments
|
(1,098 | ) | (101 | ) | 231 | |||||||
|
|
$ | (1,098 | ) | $ | (101 | ) | $ | 231 | ||||
Certain other assets are measured at fair value on a nonrecurring basis in the course of
business and are subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment):
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
Impaired loans
|
$ | 9,919 | $ | — | $ | — | $ | 9,919 | ||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Impaired loans
|
$ | 11,398 | $ | — | $ | — | $ | 11,398 | ||||||||
93
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Impaired loans (collateral dependent):
Fair value adjustments for impaired loans typically
occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment
of management based on current information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will not be collected. The measurement of
loss associated with impaired loans can be based on either the observable market price of the loan
or the fair value of the collateral. The Company measures fair value based on the value of the
collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and
inventory. The value of the collateral is determined based on internal estimates as well as third
party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The
fair value of the Company’s other real estate owned is determined using Level 3 inputs, which
include current and prior appraisals and estimated costs to sell.
The estimated fair value amounts 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
derived 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, 2010 and 2008.
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.
Investment 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.
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.
Interest Receivable/Payable
— The carrying amounts approximate fair value.
FHLB and FRB Stock
— Fair value of FHLB and FRB stock is based on the price at which it may be
resold to the FHLB and FRB.
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.
94
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Subordinated Debentures
— Rates currently available for debentures with similar terms and
remaining maturities are used to estimate fair values of existing debentures.
Commitments to Extend Credit and Standby Letter of Credit
— The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date. Due to the short-term nature
of these agreements, carrying amounts approximate fair value.
The estimated fair values of Horizon’s financial instruments are as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Cash and due from banks
|
$ | 15,683 | $ | 15,683 | $ | 68,702 | $ | 68,702 | ||||||||
|
Investment securities available for
sale
|
382,344 | 382,344 | 333,132 | 333,132 | ||||||||||||
|
Investment securities held to maturity
|
9,595 | 9,595 | 11,657 | 11,687 | ||||||||||||
|
Loans held for sale
|
18,833 | 18,833 | 5,703 | 5,703 | ||||||||||||
|
Loans, net
|
863,813 | 867,054 | 870,302 | 885,625 | ||||||||||||
|
Stock in FHLB and FRB
|
13,664 | 13,664 | 13,189 | 13,189 | ||||||||||||
|
Interest receivable
|
6,519 | 6,519 | 5,986 | 5,986 | ||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Non-interest bearing deposits
|
$ | 107,606 | $ | 107,606 | $ | 84,357 | $ | 84,357 | ||||||||
|
Interest-bearing deposits
|
877,892 | 854,617 | 867,351 | 830,621 | ||||||||||||
|
Borrowings
|
260,741 | 289,381 | 284,016 | 304,000 | ||||||||||||
|
Subordinated debentures
|
30,584 | 30,734 | 27,837 | 27,817 | ||||||||||||
|
Interest payable
|
781 | 781 | 1,135 | 1,135 | ||||||||||||
On December 19, 2008, Horizon entered into a Letter Agreement (Purchase Agreement) with the
Treasury, pursuant to which Horizon agreed to issue and sell (a) 25,000 of Horizon’s fixed Rate
Cumulative Perpetual Preferred Stock and (b) a warrant to purchase 212,104 shares of Horizon’s
common stock for an aggregate purchase price of $3,750,000 in cash.
The preferred Stock qualifies as Tier I capital and will pay cumulative dividends at a rate of 5%
per annum for the first five years and 9% per annum thereafter. The preferred Stock is non-voting
except with respect to certain matters affecting the rights of the holders thereof, and may be
redeemed by Horizon after three years. The Warrant has a ten year term and is immediately
exercisable with an exercise price of $17.68 per share of Common Stock. Pursuant to the Purchase
Agreement, Treasury has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant.
In the Purchase Agreement, Horizon agreed that, until such time as Treasury ceases to own any debt
or equity securities of the Company, acquired pursuant to the Purchase Agreement, Horizon will take
all necessary action to ensure that its benefit plans with respect to its senior executive officers
comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (EESA) as
implemented by any guidance or regulation under EESA that has been issued and is in effect as of
the date of issuance of the Preferred Stock and the Warrant, and has agreed to not adopt any
benefit plans with
95
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Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
respect to, or which cover, its senior executive officers that do not comply with the EESA,
and the applicable executives have consented to the foregoing.
Upon issuance of the Preferred Stock on December 19, 2008, the ability of Horizon to declare or pay
dividends on, or purchase, redeem or otherwise acquire for consideration, shares of its Common
Stock will be subject to restrictions, including Horizon’s restriction against increasing dividends
from the last quarterly cash dividend per share of $.17 declared on the Common Stock prior to
December 19, 2008. The redemption, purchase or other acquisition of trust preferred securities of
Horizon or its affiliates also is restricted. These restrictions will terminate the earlier of (a)
the third anniversary of the date of issuance of the Preferred Stock or (b) the date on which the
Preferred Stock has been redeemed in whole or Treasury has transferred all of the Preferred Stock
to third parties. In addition, the ability of Horizon to declare or pay dividends, or repurchase,
redeem or otherwise acquire for consideration, shares of its Common Stock will be subject to
restrictions in the event that Horizon fails to declare and pay full dividends on its Preferred
Stock.
On November 3, 2010, the Company received approval to redeem 25%, or $6.25 million, of the
Treasury’s original $25.0 million preferred stock investment in the Company from the Capital
Purchase Program, which is a program of the Troubled Assets Relief Program (“TARP”). On November
10, 2010, the Company completed the redemption process reducing the Treasury’s preferred stock
investment in the Company to $18.75 million. This repurchase will result in annual savings of
$312,500 or $0.10 per share, due to the elimination of the associated preferred dividends. The
Company’s plan is to repurchases the remaining preferred shares over the next three years from the
Company’s earnings.
Presented below is condensed financial information as to financial position, results of
operations and cash flows of Horizon Bancorp:
Condensed Balance Sheets
| December 31 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Total cash and cash equivalents
|
$ | 8,496 | $ | 11,819 | ||||
|
Investment in Bank
|
134,044 | 126,898 | ||||||
|
Other assets
|
2,341 | 4,973 | ||||||
|
Total assets
|
$ | 144,881 | $ | 143,690 | ||||
|
Liabilities
|
||||||||
|
Subordinated debentures
|
$ | 30,584 | $ | 27,837 | ||||
|
Other liabilities
|
2,014 | 1,248 | ||||||
|
Stockholders’ Equity
|
112,283 | 114,605 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 144,881 | $ | 143,690 | ||||
96
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Condensed Statements of Income
| Years Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operating Income (Expense)
|
||||||||||||
|
Dividend income from Bank
|
$ | 5,000 | $ | 7,750 | $ | 6,200 | ||||||
|
Investment income
|
6 | 2 | 10 | |||||||||
|
Other income
|
200 | (129 | ) | — | ||||||||
|
Interest expense
|
(1,688 | ) | (1,467 | ) | (1,705 | ) | ||||||
|
Employee benefit expense
|
(498 | ) | (503 | ) | (572 | ) | ||||||
|
Other expense
|
(179 | ) | (100 | ) | (104 | ) | ||||||
|
Income Before Undistributed Income of Subsidiaries
|
2,841 | 5,553 | 3,829 | |||||||||
|
Undistributed Income of Subsidiaries
|
6,759 | 2,717 | 4,201 | |||||||||
|
Income Before Tax
|
9,600 | 8,270 | 8,030 | |||||||||
|
Income Tax Benefit
|
855 | 870 | 942 | |||||||||
|
Net Income
|
10,455 | 9,140 | 8,972 | |||||||||
|
Preferred stock dividend and discount accretion
|
(1,406 | ) | (1,402 | ) | (45 | ) | ||||||
|
Net Income Available to Common Shareholders
|
$ | 9,049 | $ | 7,738 | $ | 8,927 | ||||||
Condensed Statements of Cash Flows
| Years Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operating Activities
|
||||||||||||
|
Net income
|
$ | 10,455 | $ | 9,140 | $ | 8,972 | ||||||
|
Items not requiring (providing) cash
|
||||||||||||
|
Equity in undistributed net income of Bank
|
(6,759 | ) | (2,717 | ) | (4,201 | ) | ||||||
|
Change in
|
||||||||||||
|
Income taxes receivable
|
33 | 7,523 | (954 | ) | ||||||||
|
Dividends receivable from Bank
|
2,500 | (1,500 | ) | 300 | ||||||||
|
Share based compensation
|
30 | 39 | 39 | |||||||||
|
Amortization of unearned compensation
|
68 | 164 | 233 | |||||||||
|
Other assets
|
(308 | ) | (175 | ) | 48 | |||||||
|
Other liabilities
|
250 | (82 | ) | (98 | ) | |||||||
|
Net cash provided by operating activities
|
6,269 | 12,392 | 4,339 | |||||||||
|
Investing Activities
|
||||||||||||
|
Investment in Bank
|
(3,500 | ) | — | (20,000 | ) | |||||||
|
Purchases and assumption of ATSB
|
3,412 | — | — | |||||||||
|
Net cash provided by (used in) investing activities
|
(88 | ) | — | (20,000 | ) | |||||||
|
Financing Activities
|
||||||||||||
|
Proceeds (redemption) from issuance of preferred stock
|
(6,250 | ) | — | 25,000 | ||||||||
|
Dividends paid on preferred shares
|
(1,245 | ) | (1,132 | ) | — | |||||||
|
Dividends paid on common shares
|
(2,240 | ) | (2,229 | ) | (2,147 | ) | ||||||
|
Change in borrowings
|
— | (4,700 | ) | — | ||||||||
|
Exercise of stock options
|
120 | 68 | 35 | |||||||||
|
Issuance of restricted shares
|
34 | 96 | — | |||||||||
|
Tax benefit of stock options
|
77 | 18 | 8 | |||||||||
|
Net cash provided by (used in) financing activities
|
(9,504 | ) | (7,879 | ) | 22,896 | |||||||
|
Net Change in Cash and Cash Equivalents
|
(3,323 | ) | 4,513 | 7,235 | ||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
11,819 | 7,306 | 71 | |||||||||
|
Cash and Cash Equivalents at End of Year
|
$ | 8,496 | $ | 11,819 | $ | 7,306 | ||||||
97
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following is a summary of the quarterly consolidated results of operations:
| Three Months Ended 2010 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
|
Interest income
|
$ | 16,132 | $ | 16,807 | $ | 17,876 | $ | 17,676 | ||||||||
|
Interest expense
|
5,579 | 5,439 | 5,256 | 4,601 | ||||||||||||
|
Net interest income
|
10,553 | 11,368 | 12,620 | 13,075 | ||||||||||||
|
Provision for loan losses
|
3,233 | 3,000 | 2,657 | 2,664 | ||||||||||||
|
Gain (loss) on sale of securities
|
— | 131 | 336 | 66 | ||||||||||||
|
Net income
|
1,791 | 2,515 | 3,279 | 2,871 | ||||||||||||
|
Net income available to common shareholders
|
$ | 1,439 | $ | 2,163 | $ | 2,926 | $ | 2,522 | ||||||||
|
|
||||||||||||||||
|
Earnings per share:
|
||||||||||||||||
|
Basic
|
$ | 0.44 | $ | 0.66 | $ | 0.89 | $ | 0.77 | ||||||||
|
Diluted
|
0.44 | 0.65 | 0.88 | 0.75 | ||||||||||||
|
|
||||||||||||||||
|
Average shares outstanding:
|
||||||||||||||||
|
Basic
|
3,270,217 | 3,278,392 | 3,279,201 | 3,280,331 | ||||||||||||
|
Diluted
|
3,293,192 | 3,333,768 | 3,336,634 | 3,362,118 | ||||||||||||
| Three Months Ended 2009 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
|
Interest income
|
$ | 18,674 | $ | 18,849 | $ | 17,485 | $ | 17,655 | ||||||||
|
Interest expense
|
7,258 | 7,586 | 6,766 | 6,284 | ||||||||||||
|
Net interest income
|
11,416 | 11,263 | 10,719 | 11,371 | ||||||||||||
|
Provision for loan losses
|
3,197 | 3,290 | 3,416 | 3,700 | ||||||||||||
|
Gain (loss) on sale of securities
|
— | — | 422 | 373 | ||||||||||||
|
Net income
|
2,635 | 2,064 | 2,357 | 2,084 | ||||||||||||
|
Net income available to common shareholders
|
$ | 2,285 | $ | 1,714 | $ | 2,006 | $ | 1,733 | ||||||||
|
|
||||||||||||||||
|
Earnings per share:
|
||||||||||||||||
|
Basic
|
$ | 0.71 | $ | 0.53 | $ | 0.62 | $ | 0.53 | ||||||||
|
Diluted
|
0.71 | 0.52 | 0.61 | 0.53 | ||||||||||||
|
|
||||||||||||||||
|
Average shares outstanding:
|
||||||||||||||||
|
Basic
|
3,209,482 | 3,209,482 | 3,245,505 | 3,262,927 | ||||||||||||
|
Diluted
|
3,250,424 | 3,270,178 | 3,273,742 | 3,275,588 | ||||||||||||
98
Table of Contents
Horizon Bancorp And Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
On June 1, 2010 the Company announced the completion of the purchase of assets and the
assumption of liabilities of American Trust & Savings Bank (“American”) in Whiting, Indiana. The
transaction was consummated on May 28, 2010.
The Company purchased most of the banking-related assets of American totaling $107.8 million and
assumed all the deposits, federal home loan bank advances, trust preferred securities, and accrued
interest payable in the approximate amount of $110.3 million. The Company paid a deposit premium
on core deposits of approximately $2.1 million and $500,000 in additional consideration.
The Company engaged in this transaction in the expectation that it would realize increased profits
through increasing its investment securities, loans, and deposits within a new market area.
During the first six months of 2010, the Company incurred $664,000 of third-party
transaction-related costs. The expenses are included in non-interest expense in the Company’s
condensed consolidated statements of income for the year ended December 31, 2010.
The transaction was accounted for under the acquisition method of accounting in accordance with the
Business Combination topic of the FASB Accounting Standards Codification (“Codification”). The
statement of net assets and liabilities acquired as of May 28, 2010 are presented in the table
below. The assets and liabilities of American were recorded at the respective acquisition date
fair values, and identifiable intangible assets were recorded at fair value. At the date of
closing $370,000 of loans purchased were deemed to have evidence of deterioration of credit quality
since origination and were written down to a fair value of $249,000. This amount of non-performing
loans purchased was not considered to be material to the Company or the transaction, and therefore,
no additional disclosures related to these loans are included.
|
ASSETS
|
LIABILITIES | |||||||||||
|
Cash and due from banks
|
$ | 5,601 | Deposits | |||||||||
|
Investment securities, available for sale
|
39,188 | Non-interest bearing | $ | 11,357 | ||||||||
|
|
NOW accounts | 18,725 | ||||||||||
|
Commercial
|
15,147 | Savings and money market | 42,189 | |||||||||
|
Residential mortgage
|
36,572 | Certificates of deposits | 25,468 | |||||||||
|
|
||||||||||||
|
Installment
|
4,771 | Total deposits | 97,739 | |||||||||
|
|
||||||||||||
|
Total loans
|
56,490 | |||||||||||
|
|
Borrowings | 8,749 | ||||||||||
|
FHLB stock
|
1,336 | Subordinated debentures | 2,663 | |||||||||
|
Core deposit intangible
|
1,685 | Other liabilities | 303 | |||||||||
|
Premises and equipment
|
3,107 | |||||||||||
|
Cash value life insurance
|
3,272 | |||||||||||
|
Other assets
|
836 | |||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total assets purchased
|
$ | 111,515 | Total liabilities assumed | $ | 109,454 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net assets assumed
|
$ | 2,061 | ||||||||||
|
|
||||||||||||
99
Table of Contents
|
201 N. Illinois Street, Suite 700 | |
| P.O. Box 44998 | ||
| Indianapolis, IN 46244-0998 | ||
| 317.383.4000 Fax 317.383.4200 www.bkd.com |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana
Horizon Bancorp
Michigan City, Indiana
We have audited the accompanying consolidated balance sheets of Horizon Bancorp as of December 31,
2010 and 2009, 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, 2010. 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
audit 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, 2010 and 2009, and
the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2010, in conformity with accounting principles generally accepted in the United
States of America.
Indianapolis, Indiana
March 11, 2011
|
|
100
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.
The consolidated financial statements in the Annual Report have been audited by BKD, LLP,
independent registered public accounting firm, for 2010, 2009, and 2008. 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.
101
Table of Contents
Horizon Bancorp
Summary of Selected Financial Data
(Dollars in thousands except for per share data)
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Earnings
|
||||||||||||||||||||
|
Net interest income
|
$ | 47,616 | $ | 44,769 | $ | 37,350 | $ | 32,808 | $ | 31,545 | ||||||||||
|
Provision for loan losses
|
11,554 | 13,603 | 7,568 | 3,068 | 905 | |||||||||||||||
|
Other income
|
19,906 | 17,856 | 13,831 | 12,271 | 10,137 | |||||||||||||||
|
Other expenses
|
42,571 | 37,812 | 32,779 | 31,144 | 30,455 | |||||||||||||||
|
Income tax expense
|
2,942 | 2,070 | 1,862 | 2,727 | 2,838 | |||||||||||||||
|
Net income
|
10,455 | 9,140 | 8,972 | 8,140 | 7,484 | |||||||||||||||
|
Preferred stock dividend
|
(1,406 | ) | (1,402 | ) | (45 | ) | — | — | ||||||||||||
|
Net income available to common shareholders
|
$ | 9,049 | $ | 7,738 | $ | 8,927 | $ | 8,140 | $ | 7,484 | ||||||||||
|
|
||||||||||||||||||||
|
Cash dividend declared
|
$ | 2,240 | $ | 2,229 | $ | 2,147 | $ | 1,917 | $ | 1,811 | ||||||||||
|
|
||||||||||||||||||||
|
Per Share Data
|
||||||||||||||||||||
|
Basic earnings per share
|
$ | 2.76 | $ | 2.39 | $ | 2.78 | $ | 2.54 | $ | 2.36 | ||||||||||
|
Diluted earnings per share
|
2.71 | 2.37 | 2.75 | 2.51 | 2.33 | |||||||||||||||
|
Cash dividends declared per common share
|
0.68 | 0.68 | 0.66 | 0.59 | 0.56 | |||||||||||||||
|
Book value per common share
|
28.68 | 27.67 | 24.68 | 22.03 | 19.37 | |||||||||||||||
|
Weighted-average shares outstanding
|
||||||||||||||||||||
|
Basic
|
3,277,069 | 3,232,033 | 3,208,658 | 3,200,440 | 3,177,272 | |||||||||||||||
|
Diluted
|
3,334,598 | 3,270,723 | 3,246,351 | 3,243,565 | 3,217,050 | |||||||||||||||
|
|
||||||||||||||||||||
|
Period End Totals
|
||||||||||||||||||||
|
Loans, net of deferred loan fees and unearned income
|
$ | 882,877 | $ | 886,317 | $ | 881,967 | $ | 888,852 | $ | 843,834 | ||||||||||
|
Allowance for loan losses
|
19,064 | 16,015 | 11,410 | 9,791 | 8,738 | |||||||||||||||
|
Total assets
|
1,400,919 | 1,387,020 | 1,306,857 | 1,258,874 | 1,222,430 | |||||||||||||||
|
Total deposits
|
985,498 | 951,708 | 841,169 | 893,664 | 913,973 | |||||||||||||||
|
Total borrowings
|
291,325 | 311,853 | 352,220 | 286,689 | 240,002 | |||||||||||||||
|
|
||||||||||||||||||||
|
Ratios
|
||||||||||||||||||||
|
Loan to deposit
|
89.59 | % | 93.13 | % | 104.85 | % | 99.46 | % | 92.33 | % | ||||||||||
|
Loan to total funding
|
69.15 | % | 70.14 | % | 73.90 | % | 75.30 | % | 73.12 | % | ||||||||||
|
Return on average assets
|
0.75 | % | 0.68 | % | 0.75 | % | 0.69 | % | 0.67 | % | ||||||||||
|
Average stockholders’ equity to average total assets
|
8.47 | % | 8.21 | % | 6.36 | % | 5.61 | % | 5.14 | % | ||||||||||
|
Return on average stockholders’ equity
|
9.56 | % | 8.92 | % | 11.81 | % | 12.29 | % | 13.03 | % | ||||||||||
|
Dividend payout ratio (dividends divided by net income)
|
25.07 | % | 28.74 | % | 24.00 | % | 23.51 | % | 24.03 | % | ||||||||||
|
|
||||||||||||||||||||
|
Price to book value ratio
|
92.76 | % | 58.63 | % | 50.66 | % | 118.09 | % | 143.53 | % | ||||||||||
|
Price to earnings ratio
|
9.81 | 6.85 | 4.55 | 10.21 | 11.77 | |||||||||||||||
102
Table of Contents
Horizon Bancorp
Horizon’s Common Stock and Related Stockholders’ Matters
Horizon common stock is traded on the NASDAQ Global 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 2009 and 2008.
| 2010 | ||||||||||||
| Dividends | ||||||||||||
| Common Stock Prices | Declared | |||||||||||
| High | Low | Per Share | ||||||||||
|
First Quarter
|
$ | 19.50 | $ | 16.44 | $ | 0.17 | ||||||
|
Second Quarter
|
22.81 | 19.48 | 0.17 | |||||||||
|
Third Quarter
|
22.60 | 21.15 | 0.17 | |||||||||
|
Fourth Quarter
|
26.99 | 21.89 | 0.17 | |||||||||
| 2009 | ||||||||||||
| Dividends | ||||||||||||
| Common Stock Prices | Declared | |||||||||||
| High | Low | Per Share | ||||||||||
|
First Quarter
|
$ | 13.21 | $ | 10.50 | $ | 0.17 | ||||||
|
Second Quarter
|
19.45 | 11.00 | 0.17 | |||||||||
|
Third Quarter
|
17.50 | 15.00 | 0.17 | |||||||||
|
Fourth Quarter
|
17.25 | 14.31 | 0.17 | |||||||||
There can be no assurance as to the amount of future dividends on Horizon common stock since
future dividends are subject to the discretion of the Board of Directors, cash needs, general
business conditions and dividends from the bank subsidiary. In addition, as a result of Horizon’s
participation in the TARP Capital Purchase Program, Horizon may not increase the quarterly
dividends it pays on its common stock above $0.17 per share during the three-year period ending
December 19, 2011, without the consent of the Treasury Department, unless the Treasury Department
no longer holds shares of the Series A Preferred Stock Horizon issued in the TARP Capital Purchase
Program.
The approximate number of holders of record of Horizon’s outstanding common stock as of December
31, 2010, is 564.
103
Table of Contents
Horizon Bancorp
None
Disclosure Controls and Procedures
Under the supervision of and with the participation of its management, including the Chief
Executive Officer and Chief Financial Office, 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, 2010. In making this assessment, management used the criteria set forth in “Internal
Control — Integrated Framework” 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, 2010 is effective based on the specified
criteria.
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, 2010, 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.
Not applicable.
104
Table of Contents
Horizon Bancorp
This 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 2011 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, 2010.
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 — The 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” and is incorporated into this item 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 has a code of ethics that applies to its directors, chief executive officer and chief
financial officer. The code is available on Horizon’s website at
http://www.accesshorizon.com/
.
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.
105
Table of Contents
Horizon Bancorp
The following table presents information regarding grants under all equity compensation plans of
Horizon through December 31, 2010.
| Number of Securities | ||||||||||||
| Remaining Available for | ||||||||||||
| Number of Securities to be | Weighted-Average | Future Issuance | ||||||||||
| Issued Upon Exercise of | Exercise Price of | Under Equity Compensation Plans | ||||||||||
| Outstanding Options, | Outstanding Options, | (Excluding Securities Reflected | ||||||||||
| Plan Category | Warrants and Rights | Warrants and Rights | in the First Column) | |||||||||
|
Equity compensation
plans approved by
security holders
(1)
|
48,800 | $ | 23.90 | 276,567 | ||||||||
|
|
||||||||||||
|
Equity compensation
plans not approved
by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
48,800 | $ | 23.90 | 276,567 | ||||||||
|
|
||||||||||||
| (1) | Represents options granted or available under the 1997 Key Employees’ Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp and the Horizon Bancorp 2003 Omnibus Equity Incentive Plan. |
The other information required by this item can be found in the Proxy Statement under “Common
Stock Ownership by Directors and Executive Officers,” and “Stock Ownership of Certain Beneficial
Owners and is incorporated by reference into this report.
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.
The information required by this item is incorporated by reference from the Proxy Statement section
captioned “Accountant Fees and Services.”
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Horizon Bancorp
(a) Documents Filed As Part of This Annual Report on Form 10-K:
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1. | Financial Statement | ||||
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See the Financial Statements included in Item 8. | |||||
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2. | Financial Statement Schedules | ||||
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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. | |||||
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3. | Exhibits | ||||
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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. |
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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
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Horizon Bancorp
Registrant |
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| Date: March 11, 2011 | By: | /s/ Craig M. Dwight | ||
| Craig M. Dwight | ||||
| President and Chief Executive Officer (Principal Executive Officer) | ||||
| Date: March 11, 2011 | 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 | |||
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March 11, 2011
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/s/ Robert C. Dabagia
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March 11, 2011
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/s/ Craig M. Dwight
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March 11, 2011
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/s/ Susan D. Aaron
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March 11, 2011
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/s/ Lawrence E. Burnell
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March 11, 2011
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/s/ James B. Dworkin
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March 11, 2011
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/s/ Charley E. Gillispie
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March 11, 2011
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/s/ Daniel F. Hopp
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| Date | Signature and Title | |||
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March 11, 2011
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/s/ Peter L. Pairitz
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March 11, 2011
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/s/ Larry N. Middleton
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March 11, 2011
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/s/ Robert E. Swinehart
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March 11, 2011
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/s/ Spero W. Valavanis
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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 | ||
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2.1
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Purchase and Assumption Agreement, dated December 29, 2009, by and among Horizon Bank, National Association; American Trust & Savings Bank of Whiting, Indiana; and AmTru, Inc. | Incorporated by Reference to Exhibit 2.1 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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3.1
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Articles of Incorporation of Horizon Bancorp, as amended | Incorporated by Reference to Exhibit 3 to Registrant’s Form 10-Q for the Quarter Ended September 30, 2007 | ||
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3.2
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Amended and Restated Bylaws of Horizon Bancorp | Incorporated by Reference to Exhibit 3.1 to Registrant’s Form 8-K filed July 16, 2009 | ||
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3.3
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Certificate of Designations for Series A Preferred Stock (as amended through July 15, 2008) | Incorporated by Reference to Exhibit 3.1 to Registrant’s Form 8-K filed December 23, 2008 | ||
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4.1
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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 | ||
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4.2
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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 | ||
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4.3
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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 | ||
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4.4
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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 | ||
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4.5
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Form of Certificate for Series A Preferred Stock | Incorporated by Reference to Exhibit 4.1 to Registrant’s Form 8-K filed December 23, 2008 | ||
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| Exhibit | ||||
| Number | Description | Incorporated by Reference/Attached | ||
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4.6
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Warrant for Purchase of Shares of Common Stock | Incorporated by Reference to Exhibit 4.2 to Registrant’s Form 8-K filed December 23, 2008 | ||
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10.1*
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Supplemental Employee Retirement Plan, as amended | Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-K for the year ended December 31, 2008 | ||
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10.2*
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1997 Key Employees Stock Option and Stock Appreciation Rights Plan | Incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-K for the year ended December 31, 2008 | ||
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10.3*
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Form of Amendment No. 1 to Horizon Bancorp Stock Option and Stock Appreciation Rights Agreement and Schedule Identifying Material Details of Individual Amendments | Incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-K for the year ended December 31, 2008 | ||
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10.4*
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Horizon Bancorp Amended 2003 Omnibus Equity
Incentive Plan |
Incorporated by reference to Exhibit 10.4 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.5*
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Directors Deferred Compensation Plan | Incorporated by Reference to Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.6*
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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 | ||
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10.7*
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Form of Restricted Stock Award Agreement under 2003 Omnibus Plan | Incorporated by Reference to Exhibit 10.7 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.8*
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Form of Option Grant Agreement under 2003 Omnibus Plan | Incorporated by Reference to Exhibit 10.8 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.9*
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Description of Executive Officer Bonus Plan | Incorporated by Reference to Exhibit 10.9 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.10
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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 | ||
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10.11*
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Horizon Bancorp 2005 Supplemental Executive
Retirement Plan |
Incorporated by Reference to Exhibit 10.14 to Registrant’s Form 10-K for the year ended December 31, 2006 | ||
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10.12*
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Amendment to Horizon Bancorp Restricted Stock Award Agreement, dated July 19, 2006 | Incorporated by Reference to Exhibit 10.2 to Registrant’s Form 8-K filed July 21, 2006 | ||
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10.13*
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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 | ||
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Table of Contents
| Exhibit | ||||
| Number | Description | Incorporated by Reference/Attached | ||
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10.14*
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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 | ||
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10.15*
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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 | ||
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10.16*
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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. | ||
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10.17
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Letter Agreement, dated December 19, 2008, by and between the Registrant and the United States Department of the Treasury, including the Securities Purchase Agreement — Standard Terms incorporated by reference therein | Incorporated by Reference to Exhibit 10.1 to Registrant’s Form 8-K filed December 23, 2008 | ||
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10.18*
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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, 2009 | ||
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10.19*
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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, 2009 | ||
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10.20*
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Second Amendment of the Agreement between Horizon Bank, N.A. and James H. Foglesong, dated January 1, 2009 | Incorporated by reference to Exhibit 10.20 to Registrant’s Form 10-K for the year ended December 31, 2009 | ||
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10.21
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Letter Agreement, dated November 10, 2010, by and between the Registrant and the United States Department of the Treasury | Attached | ||
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21
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Subsidiaries of Horizon | Attached | ||
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23
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Consent of BKD, LLP | Attached | ||
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31.1
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Certification of Craig M. Dwight pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Attached | ||
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31.2
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Certification of Mark E. Secor pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Attached | ||
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32.1
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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 | ||
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32.2
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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 | ||
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99.1
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Certification of Chief Executive Officer pursuant to 31 C.F.R. §30.15 | Attached | ||
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99.2
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Certification of Chief Financial Officer pursuant to 31 C.F.R. §30.15 | 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. |
112
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Operations and Summary Of Significant Accounting PoliciesNote 2 Cash EquivalentsNote 3 SecuritiesNote 4 LoansNote 5 Allowance For Loan LossesNote 6 Non-performing Assets and Impaired LoansNote 7 Premises and EquipmentNote 8 Loan ServicingNote 9 Intangible AssetsNote 10 DepositsNote 11 BorrowingsNote 12 Subordinated DebenturesNote 13 Employee Stock Ownership PlanNote 14 Employee Thrift PlanNote 15 Income TaxNote 16 Other Comprehensive Income (loss)Note 17 Commitments, Off-balance Sheet Risk and ContingenciesNote 18 Regulatory CapitalNote 19 Share-based CompensationNote 20 Derivative Financial InstrumentsNote 21 Disclosures About Fair Value Of Assets and LiabilitiesNote 22 Fair Value Of Financial InstrumentsNote 23 Capital Purchase ProgramNote 24 Condensed Financial Information (parent Company Only)Note 25 Quarterly Results Of Operations (unaudited)Note 26 American Trust & Savings BankItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related Transactions; and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules