UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2017
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: (219) 879-0211
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 22,214,898 shares of Common Stock, no par value, at August 7, 2017.
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Comprehensive Income
Condensed Consolidated Statement of Stockholders’ Equity
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
Index To Exhibits
2
PART 1 — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
(Dollar Amounts in Thousands)
Assets
Cash and due from banks
Investment securities, available for sale
Investment securities, held to maturity (fair value of $203,542 and $194,086)
Loans held for sale
Loans, net of allowance for loan losses of $15,027 and $14,837
Premises and equipment, net
Federal Reserve and Federal Home Loan Bank stock
Goodwill
Other intangible assets
Interest receivable
Cash value of life insurance
Other assets
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Total deposits
Borrowings
Subordinated debentures
Interest payable
Other liabilities
Total liabilities
Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares
Issued 0 and 0 shares
Common stock, no par value
Authorized 66,000,000 shares(1)
Issued, 22,195,715 and 22,192,530 shares(1)
Outstanding, 22,176,465 and 22,171,596 shares(1)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to condensed consolidated financial statements
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(Dollar Amounts in Thousands, Except Per Share Data)
Interest Income
Loans receivable
Investment securities
Taxable
Tax exempt
Total interest income
Interest Expense
Borrowed funds
Total interest expense
Net Interest Income
Provision for loan losses
Net Interest Income after Provision for Loan Losses
Non-interest Income
Service charges on deposit accounts
Wire transfer fees
Interchange fees
Fiduciary activities
Gains (losses) on sale of investment securities (includes $(3) and $767 for the three months ended June 30, 2017 and 2016, respectively, and $32 and $875 for the six months ended June 30, 2017 and 2016, respectively, related to accumulated other comprehensive earnings reclassifications)
Gain on sale of mortgage loans
Mortgage servicing income net of impairment
Increase in cash value of bank owned life insurance
Other income
Total non-interest income
Non-interest Expense
Salaries and employee benefits
Net occupancy expenses
Data processing
Professional fees
Outside services and consultants
Loan expense
FDIC insurance expense
Other losses
Other expense
Total non-interest expense
Income Before Income Tax
Income tax expense (includes $(1) and $268 for the three months ended
June 30, 2017 and 2016, respectively, and $11 and $306 for the six months ended June 30, 2017 and 2016, respectively, related to income tax (benefit) expense from reclassification items)
Net Income
Preferred stock dividend
Net Income Available to Common Shareholders
Basic Earnings Per Share
Diluted Earnings Per Share
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Other Comprehensive Income (Loss)
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period
Income tax effect
Changes from derivative instruments
Change in securities:
Unrealized appreciation for the period on AFS securities
Amortization from transfer of securities from available for sale to held to maturity securities
Reclassification adjustment for securities (gains) losses realized in income
Unrealized gains on securities
Other Comprehensive Income, Net of Tax
Comprehensive Income
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HORIZON BANCORP ANDSUBSIDIARIES
(Unaudited)
Balances, January 1, 2017
Net income
Other comprehensive income, net of tax
Amortization of unearned compensation
Exercise of stock options
Stock option expense
Cash dividends on common stock ($0.24 per share)
Balances, June 30, 2017
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Operating Activities
Items not requiring (providing) cash
Depreciation and amortization
Share based compensation
Mortgage servicing rights net impairment
Premium amortization on securities available for sale, net
Gain on sale of investment securities
Proceeds from sales of loans
Loans originated for sale
Change in cash value of life insurance
Gain (Loss) on sale of other real estate owned
Net change in
Net cash provided by operating activities
Investing Activities
Purchases of securities available for sale
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale
Purchases of securities held to maturity
Proceeds from maturities of securities held to maturity
Change in Federal Reserve and FHLB stock
Net change in loans
Proceeds on the sale of OREO and repossessed assets
Change in premises and equipment, net
Acquisition of Kosciusko, net of cash received
Acquisition of branch, net of cash received
Net cash used in investing activities
Financing Activities
Redemption of preferred stock
Proceeds from issuance of stock
Dividends paid on common shares
Dividends paid on preferred shares
Net cash provided by financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
Additional Supplemental Information
Interest paid
Income taxes paid
Transfer of loans to other real estate owned
Acquisition of LaPorte, measurement period adjustments
The Company purchased all of the capital stock of Kosciusko for $22,983 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired
Less: common stock issued
Cash paid for the capital stock
Liabilities assumed
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(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 - Accounting Policies
The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2017 and June 30, 2016 are not necessarily indicative of the operating results for the full year of 2017 or 2016. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10-K for 2016 filed with the Securities and Exchange Commission on February 28, 2017. The condensed consolidated balance sheet of Horizon as of December 31, 2016 has been derived from the audited balance sheet as of that date.
On October 18, 2016, the Board of Directors of the Company approved a three-for-two stock split of the Company’s authorized common stock, no par value. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this three-for-two stock split. The effect of the three-for-two stock split on the outstanding common shares is that shareholders of record as of the close of business on October 31, 2016, the record date, received an additional half share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were issued on November 14, 2016, and the common shares began trading on a split-adjusted basis on or about November 15, 2016.
Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
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The following table shows computation of basic and diluted earnings per share.
Three Months Ended
June 30
Six Months Ended
Basic earnings per share
Less: Preferred stock dividends
Net income available to common shareholders
Weighted average common shares outstanding(1)
Diluted earnings per share
Effect of dilutive securities:
Restricted stock
Stock options
Weighted average shares outstanding
There were zero shares for the three and six months ended June 30, 2017 and 2016 which were not included in the computation of diluted earnings per share because they were non-dilutive.
Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2016 Annual Report on Form 10-K.
Reclassifications
Certain reclassifications have been made to the 2016 condensed consolidated financial statements to be comparable to 2017. These reclassifications had no effect on net income.
Note 2 – Acquisitions
Kosciusko Financial, Inc.
On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional
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services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. The final valuation numbers were received in September 2016 which changed the goodwill estimate from $6.9 million to $6.4 million.
ASSETS
Commercial
Residential mortgage
Consumer
Total loans
FRB and FHLB stock
Core deposit intangible
Total assets purchased
Common shares issued
Cash paid
Total estimated purchase price
Of the total estimated purchase price of $23.0 million, $526,000 has been allocated to core deposit intangible. Additionally, $6.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight line basis.
The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
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Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of June 1, 2016.
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected (nonaccretable differences)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
Fair value of acquired loans accounted for under ASC310-30
Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
LaPorte Bancorp, Inc. On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, less the consideration used to pay off LaPorte’s ESOP loan receivable, the transaction has an implied valuation of approximately $98.6 million. The Company has had approximately $4.0 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.
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Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the LaPorte Bancorp acquisition is detailed in the following table.
Mortgage Warehousing
FHLB stock
Of the total estimated purchase price of $98.6 million, $2.5 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight line basis.
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The following table details an estimate of the acquired loans that are accounted for in accordance with ASC 310-30 as of July 18, 2016.
Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Goodwill was increased by $703,000 during the six months ended June 30, 2017 due to measurement period adjustments.
CNB Bancorp
On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana (“CNB”) and the Bank’s acquisition of The Central National Bank and Trust Company (“Central National Bank & Trust”), through mergers effective November 7, 2016. Under terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million.
Under the acquisition method of accounting, the total estimated purchase price is allocated to CNB’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the CNB acquisition is allocated as follows:
Of the total purchase price of $5.3 million, $190,000 has been allocated to core deposit intangible. Additionally, $609,000 has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight line basis.
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The Company acquired the $10.8 million performing loan portfolio with an estimated fair value of $10.5 million. No loans were purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired.
The results of operations of CNB, LaPorte Bancorp and Kosciusko have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro-forma results for the three and six months ended June 30, 2017 and 2016 as if the CNB, LaPorte Bancorp and Kosciusko acquisitions had occurred as of the beginning of the comparable prior reporting periods.
Summary of Operations:
Provision for Loan Losses
Non-Interest Expense
Income before Income Taxes
Income Tax Expense
The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects.
The pro-forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
Bargersville Branch Purchase
On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $10.9 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $463,000 was recorded in the transaction, which will be amortized over ten years on a straight line basis. There was no goodwill generated in the transaction.
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Note 3 – Securities
The fair value of securities is as follows:
Available for sale
U.S. Treasury and federal agencies
State and municipal
Federal agency collateralized mortgage obligations
Federal agency mortgage-backed pools
Private labeled mortgage-backed pools
Corporate notes
Total available for sale investment securities
Held to maturity
Total held to maturity investment securities
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio and held-to-maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, 2017, no individual investment security had an unrealized loss that was determined to be other-than-temporary.
The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 2017.
15
The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2017 and December 31, 2016, 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.
Within one year
One to five years
Five to ten years
After ten years
The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
Total temporarily impaired securities
16
Information regarding security proceeds, gross gains and gross losses are presented below.
Sales of securities available for sale (Unaudited)
Proceeds
Gross gains
Gross losses
Note 4 – Loans
Working capital and equipment
Real estate, including agriculture
Other
Total
Real estate
1–4 family
Auto
Recreation
Real estate/home improvement
Home equity
Unsecured
Mortgage warehouse
Allowance for loan losses
Loans, net
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely
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affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Real Estate and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
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The following table shows the recorded investment of individual loan categories.
Owner occupied real estate
Non owner occupied real estate
Residential spec homes
Development & spec land loans
Commercial and industrial
Total commercial
Residential construction
Total real estate
Direct installment
Direct installment purchased
Indirect installment
Total consumer
Net loans
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Note 5 – Accounting for Certain Loans Acquired in a Transfer
The Company acquired loans in acquisitions and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:
Outstanding balance
Carrying amount, net of allowance of $71
Carrying amount, net of allowance of $0
Accretable yield, or income expected to be collected for the six months ended June 30, is as follows:
Balance at January 1
Additions
Accretion
Reclassification from nonaccretable difference
Disposals
Balance at June 30
During the six months ended June 30, 2017 and 2016, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $71,000 and $0, respectively.
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Note 6 – Allowance for Loan Losses
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.
Balance at beginning of the period
Loans charged-off:
Residential development
Development & Spec Land Loans
Direct Installment
Direct Installment Purchased
Indirect Installment
Home Equity
Total loans charged-off
Recoveries of loans previouslycharged-off:
Total loan recoveries
Net loans charged-off (recovered)
Provision charged to operating expense
Total provision charged to operating expense
Balance at the end of the period
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Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value, which is the appraised value less estimated selling costs, of the underlying collateral.
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.
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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total ending allowance balance
Loans:
Total ending loans balance
23
Note 7 – Non-performing Loans and Impaired Loans
The following table presents the non-accrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans:
Total Consumer
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Included in the $8.8 million of non-accrual loans and the $668,000 of non-performing TDRs at June 30, 2017 were $3.9 million and $17,000, respectively, of loans acquired for which accretable yield was recognized.
From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to generally place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Credit Officer and/or the Chief Operations Officer must review all loans placed onnon-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.
A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include the three methods described above.
The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2017, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of June 30, 2017, the Company had $2.6 million in TDRs and $1.9 million were performing according to the restructured terms and $301,000 in TDRs were returned to accrual status during the first six months of 2017. There were zero specific reserves allocated to TDRs at June 30, 2017 based on the discounted cash flows or when appropriate the fair value of the collateral.
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The following table presents commercial loans individually evaluated for impairment by class of loan:
With no recorded allowance
With an allowance recorded
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The following table presents the payment status by class of loan:
Percentage of total loans
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.
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Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.
Horizon Bank employs a nine-grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.
Risk Grade 1: Excellent (Pass)
Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2: Good (Pass)
Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.
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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:
Risk Grade 4 Satisfactory/Monitored:
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.
Risk Grade 4W Management Watch:
Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.
Risk Grade 5: Special Mention
Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.
Risk Grade 6: Substandard
One or more of the following characteristics may be exhibited in loans classified Substandard:
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Risk Grade 7: Doubtful
One or more of the following characteristics may be present in loans classified Doubtful:
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.
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The following table presents loans by credit grades.
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Note 8 – Repurchase Agreements
The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Bank’s control.
The following table shows repurchase agreements accounted for as secured borrowings (in thousands):
June 30, 2017
Repurchase Agreements andrepurchase-to-maturity transactions
Repurchase Agreements
Securities pledged for Repurchase Agreements
Note 9 – Derivative Financial Instruments
Cash Flow Hedges
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at June 30, 2017 and December 31, 2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at June 30, 2017 and December 31, 2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At June 30, 2017, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.
Fair Value Hedges
Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2017, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.
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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 $149.7 million at June 30, 2017 and $122.4 million at December 31, 2016.
Other Derivative Instruments
The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, 2017, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
Derivatives designated as hedging
instruments (Unaudited)
Interest rate contracts
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Mortgage loan contracts
Total derivatives not designated as hedging instruments
Total derivatives
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The effect of the derivative instruments on the condensed consolidated statements of income for the three- month and six-month periods ending June 30 is as follows:
Derivative in cash flow
hedging relationship
FASB Accounting Standards Codification (“ASC”) Topic820-10-20 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.
Derivative in fair valuehedging relationship
Location of gain (loss)recognized on derivative
Derivative not designatedas hedging relationship
Mortgage contracts
Note 10 – Disclosures about Fair Value of Assets and Liabilities
The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:
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Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2017. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available for sale securities
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.
Hedged loans
Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.
Interest rate swap agreements
The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.
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The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
Available-for-salesecurities
Totalavailable-for-sale securities
Forward sale commitments
Commitments to originate loans
December 31, 2016
Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:
Non Interest Income
Total gains and losses from:
Fair value interest rate swap agreements
Derivative loan commitments
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Certain other assets are measured at fair value on a non-recurringbasis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
Impaired loans
Mortgage servicing rights
Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $23,000 during the first six months of 2017 and decreased by $46,000 during the first six months of 2016.
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The following table presents qualitative information about unobservable inputs used in recurring and non-recurring Level 3 fair value measurements, other than goodwill.
Valuation
Technique
Unobservable Inputs
Note 11 – Fair Value of Financial Instruments
The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.
The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at June 30, 2017 and December 31, 2016. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due from Banks — The carrying amounts approximate fair value.
Held-to-Maturity Securities — For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.
Loans Held for Sale — The carrying amounts approximate fair value.
Net Loans — The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.
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FHLB and FRB Stock — Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.
Interest Receivable/Payable — The carrying amounts approximate fair value.
Deposits — The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.
Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.
Subordinated Debentures — Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.
Commitments to Extend Credit and Standby Letters of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (unaudited).
Investment securities, held to maturity
Loans excluding loan level hedges, net
Stock in FHLB and FRB
Non-interest bearing deposits
Interest-bearing deposits
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Note 12 – Accumulated Other Comprehensive Income
Unrealized gain (loss) on securities available for sale
Unamortized gain on securities held to maturity, previously transferred from AFS
Unrealized loss on derivative instruments
Tax effect
Total accumulated other comprehensive income (loss)
Note 13 – Regulatory Capital
Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For June 30, 2017, Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally, under Basel III rules, the decision was made to opt-outof including accumulated other comprehensive income in regulatory capital.
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To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (June 30, 2017) and Tier I leverage ratios as set forth in the table below. As of June 30, 2017 and December 31, 2016, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the second quarter of 2017 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.
Horizon and the Bank’s actual and required capital ratios as of June 30, 2017 and December 31, 2016 were as follows:
As of June 30, 2017
Total capital1 (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital1 (to risk-weighted assets)
Common equity tier 1 capital1 (to risk-weighted assets)
Tier 1 capital1 (to average assets)
As of December 31, 2016
Note 14 – Preferred Stock Redemption
On February 1, 2016, Horizon completed the redemption (the “Redemption”) of all 12,500 outstanding shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “SBLF Preferred Stock”) which were held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund (“SBLF”). The SBLF Preferred Stock was redeemed at its liquidation value of $1,000 per share, plus accrued dividends, for a total Redemption price of $12,510,416.67. Horizon funded the Redemption using cash on hand without borrowing and without a special dividend from the Bank. Following the Redemption, Horizon does not have any shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series B outstanding. The Redemption terminates Horizon’s participation in the SBLF.
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Note 15 – Business Combinations
On May 23, 2017, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Lafayette Community Bancorp (“Lafayette”). Pursuant to the Merger Agreement, Lafayette would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Lafayette Community Bank, a wholly-owned subsidiary of Lafayette, would merge with and into a wholly-owned subsidiary of Horizon, Horizon Bank, with Horizon Bank as the surviving bank.
The boards of directors of each of Horizon and Lafayette have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Lafayette shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger during the third quarter of 2017.
In connection with the Merger, shareholders of Lafayette will receive fixed consideration of 0.5878 shares of Horizon common stock and $1.73 in cash for each share of Lafayette common stock. Shareholders owning less than 100 shares of Lafayette common stock will receive $17.25 in cash for each share. On December 29, 2016, Horizon purchased 90,574 shares, or 4.65%, of Lafayette’s outstanding common stock from a Lafayette shareholder. Based on the closing price of Horizon’s common stock on May 22, 2017 of $25.38 per share, the transaction value for the shares of common stock, owned by shareholders other than Horizon, is approximately $32.0 million.
Subject to certain terms and conditions, the board of directors of Lafayette has agreed to recommend the approval and adoption of the Merger Agreement to the Lafayette shareholders and will solicit proxies voting in favor of the Merger from Lafayette’s shareholders.
The Merger Agreement also provides for certain termination rights for both Horizon and Lafayette, and further provides that upon termination of the Merger Agreement under certain circumstances, Lafayette will be obligated to pay Horizon a termination fee.
As of March 31, 2017, Lafayette had total assets of approximately $172.1 million and total deposits of approximately $149.2 million and total loans of approximately $135.2 million.
On June 13, 2017, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Wolverine Bancorp, Inc. (“Wolverine”). Pursuant to the Merger Agreement, Wolverine would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Wolverine Bank, a wholly-owned subsidiary of Wolverine, would merge with and into a wholly-owned subsidiary of Horizon, Horizon Bank, with Horizon Bank as the surviving bank.
The boards of directors of each of Horizon and Wolverine have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Wolverine shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger during the fourth quarter of 2017.
In connection with the Merger, shareholders of Wolverine will receive fixed consideration of 1.0152 shares of Horizon common stock and $14.00 in cash for each share of Wolverine common stock. Based on the closing price of Horizon’s common stock on June 13, 2017 of $27.50 per share, the transaction value has an implied valuation of approximately $91.8 million.
Subject to certain terms and conditions, the board of directors of Wolverine has agreed to recommend the approval and adoption of the Merger Agreement to the Wolverine shareholders and will solicit proxies voting in favor of the Merger from Wolverine’s shareholders.
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The Merger Agreement also provides for certain termination rights for both Horizon and Wolverine, and further provides that upon termination of the Merger Agreement under certain circumstances, Wolverine will be obligated to pay Horizon a termination fee.
As of March 31, 2017, Wolverine reported total assets of approximately $379.3 million, total deposits of approximately $271.1 million and total loans of approximately $315.9 million.
Note 16 – Future Accounting Matters
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),Premium Amortization on Purchased Callable Debt Securities
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this update were adopted on January 1, 2017 and did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Updates No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
The FASB has issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
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FASB Accounting Standards Updates No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business
The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.
FASB Accounting Standards Updates No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The FASB has issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
FASB Accounting Standards Updates No. 2016-09, Compensation – Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Acounting
The FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and resulted in a tax benefit of $19,000 for the three and six months ended June 30, 2017.
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FASB Accounting Standards Updates No. 2016-02,Leases (Topic 842)
The FASB has issued Accounting Standards Update (ASU)No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2016, we do not expect the new standard to have a material impact on our balance sheet or income statement.
FASB Accounting Standards Updates No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.
The new guidance makes targeted improvements to existing U.S. GAAP by:
The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies andnot-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
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Note 17 – General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operation and cash flows of the Company.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2017 and 2016
Forward–Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:
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The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2016 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.
Overview
Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northern and Central Indiana, Southwestern and Central Michigan and Central Ohio through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was originally chartered as a national banking association in 1873 and has operated continuously since that time, however converted to an Indiana state-chartered bank in June 2017. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.
On June 14, 2017, Horizon and Wolverine Bancorp, Inc. (“Wolverine”) announced the execution on June 13, 2017 of a definitive agreement whereby Horizon will acquire Wolverine and its wholly-owned subsidiary, Wolverine Bank, through a stock and cash merger. Under the terms of the merger agreement, shareholders of Wolverine will receive fixed consideration of 1.0152 shares of Horizon common stock and $14.00 in cash for each share of Wolverine’s common stock. As of March 31, 2017, Wolverine had total assets of approximately $379.3 million.
On May 23, 2017, Horizon and Lafayette Community Bancorp (“Lafayette”) announced the execution of a definitive agreement whereby Horizon will acquire Lafayette and its wholly-owned subsidiary, Lafayette Community Bank, through a stock and cash merger. Under the terms of the merger agreement, shareholders of Lafayette will receive fixed consideration of 0.5878 shares of Horizon common stock and $1.73 in cash for each share of Lafayette’s common stock. Lafayette shareholders owning less than 100 shares of common stock will receive $17.25 in cash for each share. As of March 31, 2017, Lafayette had total assets of approximately $172.1 million.
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On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, located in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction and a premium on deposits assumed in the transaction.
On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana (“CNB”) and the Bank’s acquisition of The Central National Bank and Trust Company (“Central National Bank & Trust”), through mergers effective November 7, 2016. Under the terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million.
On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly-owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, the transaction has an implied valuation of approximately $98.6 million.
On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock, or a combination of both, for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million.
Following are some highlights of Horizon’s financial performance through the second quarter of 2017:
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Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2016 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Loan Losses
An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio.
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The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2017, Horizon had core deposit intangibles of $9.1 million subject to amortization and $77.6 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC350-10 requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on June 30, 2017 was $26.35 per share compared to a book value of $16.11 per common share.
Horizon has concluded that, based on its own internal evaluation, the recorded value of goodwill is not impaired.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the
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historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815-10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post-retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
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Financial Condition
On June 30, 2017, Horizon’s total assets were $3.3 billion, an increase of approximately $180.0 million compared to December 31, 2016. The increase was primarily in net loans of $131.5 million, investment securities available for sale of $65.2 million and investment securities held to maturity of $6.3 million which were offset by decreases in Federal Reserve Bank stock of $9.0 million, other assets of $5.7 million, cash and due from banks of $4.8 million and loans held for sale of $4.4 million.
Investment securities were comprised of the following as of (dollars in thousands):
Total investment securities increased by approximately $71.5 million at June 30, 2017 compared to December 31, 2016, primarily due to the investing of cash received from the Bargersville branch purchase and the CNB merger and increasing earning assets due to lower mortgage warehouse balances.
Total loans increased $127.4 million since December 31, 2016 to $2.3 billion as of June 30, 2017. This increase was the result of an increase in commercial loans of $73.8 million, consumer loans of $51.8 million and residential mortgage loans of $18.1 million, offset by a decrease in mortgage warehouse loans of $12.0 million and a decrease in loans held for sale of $4.4 million. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $83.1 million during the first six months of 2017 leading to the increase in commercial loans. Additionally, the consumer loan increase was the result of a new seasoned consumer loan portfolio manager hired in the third quarter of 2016 and increasing our focus on the management of direct consumer loans.
Total deposits decreased $52.4 million since December 31, 2016 to $2.4 billion as of June 30, 2017. Interest bearing transaction accounts and time deposits decreased $46.5 million and $23.6 million, respectively, and were offset by increases in interest bearing deposit accounts of $5.7 million and non-interest bearing accounts of $12.1 million during the six months ended June 30, 2017. The decrease in interest bearing transaction accounts and time deposits is primarily due to the seasonality of certain municipal deposit accounts.
The Company’s borrowings increased $217.8 million from December 31, 2016 to $485.3 million as of June 30, 2017. At June 30, 2017, the Company had $339.4 million in short-term funds borrowed compared to $189.0 million at December 31, 2016. The increase in borrowings was utilized to fund loan growth of $127.4 million and offset the decrease in total deposits of $52.4 million since December 31, 2016.
Stockholders’ equity totaled $357.3 million at June 30, 2017 compared to $340.9 million at December 31, 2016. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared. At June 30, 2017, the ratio of average stockholders’ equity to average assets was 10.94% compared to 10.59% at December 31, 2016. Book value per common share at June 30, 2017 increased to $16.11 compared to $15.37 at December 31, 2016.
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Results of Operations
Consolidated net income for the three-month period ended June 30, 2017 was $9.1 million compared to $6.3 million for the same period in 2016. Earnings per common share for the three months ended June 30, 2017 were $0.41 basic and diluted, compared to $0.35 basic and diluted for the same three-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income of $6.3 million, partially offset by a decrease in non-interest income of $1.1 million and increases in non-interest expense of $1.5 million, income tax expense of $895,000 and the diluted shares outstanding primarily due to the stock issued in the Kosciusko Financial, Inc. and LaPorte Bancorp, Inc. acquisitions. Non-interest expenses increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense and other expense. Excluding acquisition-related expenses, gain/losses on sale of investment securities and purchase accounting adjustments, net income for the second quarter of 2017 was $8.6 million or $0.39 diluted earnings per share compared to $6.9 million or $0.38 diluted earnings per share in the same period of 2016.
Consolidated net income for the six-month period ended June 30, 2017 was $17.3 million compared to $11.7 million for the same period in 2016. Earnings per common share for the six months ended June 30, 2017 were $0.78 basic and $0.77 diluted, compared to $0.65 basic and $0.64 diluted for the same six-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income of $12.1 million, partially offset by a decrease in non-interest income of $882,000 and increases in non-interest expense of $3.8 million, income tax expense of $2.0 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko Financial, Inc. and LaPorte Bancorp, Inc. acquisitions.Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense and other expense. Excluding acquisition-related expenses, gains/losses on sale of investment securities and purchase accounting adjustments, net income for the six months ended June 30, 2017 was $16.1 million or $0.72 diluted earnings per share compared to $12.3 million or $0.68 diluted earnings per share in the same period of 2016.
The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income during the three months ended June 30, 2017 was $27.2 million, an increase of $6.3 million from the $20.9 million earned during the same period in 2016. Yields on the Company’s interest-earning assets increased by 23 basis points to 4.33% for the three months ending June 30, 2017 from 4.10% for the three months ended June 30, 2016. Interest income increased $6.2 million from $24.7 million for the three months ended June 30, 2016 to $30.8 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $939,000 for the three months ending June 30, 2017 compared to $397,000 for the same period of 2016.
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The following are the average balance sheets for the three months ending (dollars in thousands):
June 30, 2016
Interest-earning assets
Federal funds sold
Interest-earning deposits
Investment securities - taxable
Investment securities - non-taxable (1)
Loans receivable (2)(3)
Total interest-earning assets (1)
Non-interest-earning assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing liabilities
Demand deposits
Accrued interest payable and other liabilities
Stockholders’ equity
Net interest income/spread
Net interest income as a percent of average interest earning assets (1)
Rates paid on interest-bearing liabilities decreased by 13 basis points for the three-month period ended June 30, 2017 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $174,000 compared to the three-month period ended June 30, 2016 to $3.6 million for the same period in 2017. This decrease was due to lower average balances of borrowings in addition to lower rates paid on interest-bearing deposits and borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.
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The net interest margin increased 36 basis points from 3.48% for the three-month period ended June 30, 2016 to 3.84% for the same period in 2017. The increase in the margin for the three-month period ended June 30, 2017 compared to the same period in 2016 was due to an increase in the yield on interest-earning assets and a reduction in the cost on interest-bearing liabilities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.71% for the three-month period ending June 30, 2017 compared to 3.42% for the same period in 2016.
Net interest income during the six months ended June 30, 2017 was $52.8 million, an increase of $12.1 million from the $40.6 million earned during the same period in 2016. Yields on the Company’s interest-earning assets increased by 19 basis points to 4.29% for the six months ending June 30, 2017 from 4.10% for the six months ended June 30, 2016. Interest income increased $11.5 million from $48.2 million for the six months ended June 30, 2016 to $59.6 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $2.0 million for the six months ending June 30, 2017 compared to $944,000 for the same period of 2016.
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Rates paid on interest-bearing liabilities decreased by 16 basis points for thesix-month period ended June 30, 2017 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $662,000 compared to the six-month period ended June 30, 2016 to $6.9 million for the same period in 2017. This decrease was due to lower average balances of borrowings in addition to lower rates paid on interest-bearing deposits and borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.
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The net interest margin increased 34 basis points from 3.47% for thesix-month period ended June 30, 2016 to 3.81% for the same period in 2017. The increase in the margin for the six-month period ended June 30, 2017 compared to the same period in 2016 was due to an increase in the yield on interest-earning assets and a reduction in the cost on interest-bearing liabilities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.67% for the six-month period ending June 30, 2017 compared to 3.40% for the same period in 2016.
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolio. During the three-month period ended June 30, 2017, a provision of $330,000 was required to adequately fund the ALLL compared to $232,000 for the same period of 2016. Commercial loan net charge-offs during the three-month period ended June 30, 2017 were $24,000, residential mortgage loan net charge-offs were negative $8,000 and consumer loan net charge-offs were $341,000. The increase in the provision for loan losses in the first quarter of 2017 compared to the same period of 2016 was due to increased loan balances. The ALLL balance at June 30, 2017 was $15.0 million or 0.66% of total loans. This compares to an ALLL balance of $14.8 million at December 31, 2016 or 0.69% of total loans. The decrease in the ratio at June 30, 2017 compared to December 31, 2016 was due to an increase in loan balances, excluding loans held for sale, of $131.7 million.
For the six-month period ended June 30, 2017, the provision for loan losses totaled $660,000 compared to $764,000 in the same period of 2016. The lower provision for loan losses for the six months ended June 30, 2017 compared to the same period of 2016 was due to a decrease in net charge-offs.
Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.82% as of June 30, 2017. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.18% as of June 30, 2017. The table below illustrates Horizon’s loan loss reserve ratio composition as of June 30, 2017.
Non- GAAP Allowance for Loan and Lease Loss Detail
(Dollars in Thousands, Unaudited)
Pre-discount loan balance
Allowance for loan losses (ALLL)
Loan discount
ALLL+loan discount
ALLL/ pre-discount loan balance
Loan discount/ pre-discount loan balance
ALLL+loan discount/ pre-discount loan balance
No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of June 30, 2017.
Non-performing loans totaled $11.6 million as of June 30, 2017, up from $10.7 million as of December 31, 2016. Non-performing commercial, real estate and consumer loans increased by $362,000, $263,000 and $255,000, respectively, at June 30, 2017 compared to December 31, 2016.
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Other Real Estate Owned (OREO) totaled $2.2 million at June 30, 2017 compared to $3.2 million on December 31, 2016 and $3.5 million on June 30, 2016.
The following is a summary of changes in non-interest income (table dollar amounts in thousands):
Mortgage servicing net of impairment
Increase in cash surrender value of bank owned life insurance
Total non-interest income was $1.1 million lower during the second quarter of 2017 compared to the same period of 2016. Service charges on deposit accounts increased $149,000, interchange fees increased by $404,000, and fiduciary activities increased $478,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the first quarter of 2017 generated $2.1 million of income from the gain on sale of mortgage loans, down $1.5 million from the same period in 2016. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $83.3 million in the second quarter of 2016 to $57.5 million in the same period of 2017 which was slightly offset by an increase in the percentage earned on the sale of these loans from 3.68% in the second quarter of 2016 to 3.84% in the same period of 2017. Other income increased $241,000 in the second quarter of 2017 when compared to the same period of 2016. The Company recognized gains on other real estate owned properties of $65,000 in the second quarter of 2017 compared to losses on other real estate owned properties of $190,000 in the same period of 2016.
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Total non-interest income was $882,000 lower in the first six months of 2017 when compared to the same period of 2016. Service charges on deposit accounts increased $261,000, interchange fees increased $649,000 and fiduciary activities increased $765,000, primarily due to overall company growth and increased volume. Gain on sale of investment securities decreased $843,000 due to gains realized in the first six months of 2016 as a result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting loan-term earnings. Residential mortgage loan activity during the first six months of 2017 generated $4.0 million from the gain on sale of mortgage loans, down $1.7 million from the same period in 2016. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $138.5 million in the first six months of 2016 to $107.5 million in the same period of 2017 which was slightly offset by an increase in the percentage earned on the sale of these loans from 3.74% for the first six months of 2016 to 3.89% in the same period of 2017.
The following is a summary of changes in non-interest expense (table dollar amounts in thousands):
Salaries
Commission and bonuses
Employee benefits
FDIC deposit insurance
Total non-interest expense was $933,000 higher in the second quarter of 2017 compared to the same period of 2016. Excluding merger-related expenses of $200,000 and $1.9 million recorded during the three months ended June 30, 2017 and 2016, respectively, total non-interest expense increased $3.2 million, or 16.9%. Salaries increased by $1.9 million due to a larger employee base. Net occupancy expense increased $295,000 due to Horizon’s investment in growth markets and the Kosciusko, LaPorte Bancorp and CNB acquisitions. Data processing expenses increased $368,000 primarily due to company growth. Outside service and consultant, professional fees and other expense decreased $933,000, $212,000 and $351,000, respectively in the second quarter of 2017 when compared to the same period of 2016 primarily due to one-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. FDIC insurance expense was $166,000 lower in the second quarter of 2017 when compared to the same period of 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and during 2017. Loan expenses decreased $159,000 primarily due to a decrease in loan collection expenses.
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Total non-interest expense was $2.7 million higher for the six months ended June 30, 2017 compared to the same period of 2016. Excluding merger-related expenses of $200,000 and $2.5 million recorded during the six months of June 30, 2017 and 2016, respectively, totalnon-interest expense increased $6.1 million, or 16.2%. Salaries increased by $3.5 million due to a larger employee base. Net occupancy expenses increased $811,000 due to Horizon’s investment in growth markets and the Kosciusko, LaPorte Bancorp and CNB acquisitions. Data processing expenses increased $570,000 primarily due to company growth. Outside services and consultants, professional fees and other expenses decreased $810,000, $430,000 and $397,000, respectively, for the six months ended June 30, 2017 compared to the same period of 2016 primarily due to one-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. FDIC deposit insurance expense was $308,000 lower for the first six months of 2017 when compared to the same period in 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and in 2017. Other losses decreased $275,000 for the six months ended June 30, 2017 when compared to the same period in 2016, primarily due to a decrease in debit card related expense. Loan expense decreased $247,000 as loan collection expenses were lower during the first six months of 2017 when compared to the same period of 2016.
Income Taxes
Income tax expense for the second quarter of 2017 was $3.5 million compared to $2.6 million for the same period of 2016. The effective tax rate for the second quarter of 2017 was 28.0% compared to 29.3% in the same period of 2016. The decrease in the effective tax rate for the second quarter of 2017 was primarily due to a lower level of non-tax deductible merger-related expenses when compared to the same period of 2016.
Income tax expense for the six months ended June 30, 2017 was $6.6 million compared to $4.6 million for the same period of 2016. The effective tax rate for the first six months of 2017 was 27.5% compared to 28.2% in the same period of 2016. The decrease in the effective tax rate for the six months ended June 30, 2017 was primarily due to a lower level of non-tax deductible merger-related expenses when compared to the same period of 2016.
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Liquidity
The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including the FHLB. During the six months ended June 30, 2017, cash and cash equivalents decreased by approximately $4.8 million. At June 30, 2017, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $181.2 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $453.9 million at December 31, 2016 and $300.6 million at June 30, 2016.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2017. Stockholders’ equity totaled $357.3 million as of June 30, 2017, compared to $340.9 million as of December 31, 2016. For the six months ended June 30, 2017, the ratio of average stockholders’ equity to average assets was 11.03% compared to 10.22% for the twelve months ended December 31, 2016. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared.
On February 1, 2016, the Company paid off the $12.5 million in funds received through the Small Business Lending Fund with cash from the holding company, thereby ending its participation in the program, pursuant to which it issued preferred stock to the US Treasury. The funds were paid off due to an increase in the dividend cost that would have gone in effect at the end of February 2016.
Horizon declared common stock dividends in the amount of $0.24 per share during the first six months of 2017 and $0.20 per share for the same period of 2016. The dividend payout ratio (dividends as a percent of basic earnings per share) was 30.8% and 30.8% for the first six months of 2017 and 2016, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2016.
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Use of Non-GAAP Financial Measures
Certain information set forth in this quarterly report on Form 10-Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non-GAAP financial measures of the net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to be non-recurring. Horizon believes that these non-GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and one-time costs of acquisitions and non-core items, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.
Non-GAAP Reconciliation of Net Interest Margin
Net Interest Margin As Reported
Net interest income
Average interest-earning assets
Net interest income as a percent of average interest-earning assets (“Net Interest Margin”)
Impact of Acquisitions
Interest income from acquisition-related purchase accounting adjustments
Excluding Impact of Prepayment Penalties and Acquisitions
Core Net Interest Margin
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Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share
(Dollars in Thousands Except per Share Data)
Net income as reported
Merger expenses
Net income excluding merger expenses
Net income excluding gain on sale of investment securities
Acquisition-related purchase accounting adjustments (“PAUs”)
Net income excluding PAUs
Non-GAAP Reconciliation of Diluted Earnings per Share
Diluted earnings per share as reported
Diluted earnings per share excluding merger expenses
Acquisition-related PAUs
Diluted earnings per share excluding PAUs
Non-GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
Less: Intangible assets
Total tangible stockholders’ equity
Common shares outstanding
Tangible book value per common share
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Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon’s 2016 Annual Report on Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2016 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
Based on an evaluation of disclosure controls and procedures as of June 30, 2017, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes In Internal Control Over Financial Reporting
Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended June 30, 2017, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.
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Part II – Other Information
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.
There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10-K for 2016.
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Craig M. Dwight
/s/ Mark E. Secor
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INDEX TO EXHIBITS
Exhibit No.
Description
Location
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