United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
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.)
(219) 879-0211
Registrant’s telephone number, including area code:
N/A
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 4,997,017 shares of Common Stock, no par value, at May 10, 2012.
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1A.
Item 5.
Item 6.
Signatures
Index To Exhibits
2
PART 1 — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
Cash and due from banks
Investment securities, available for sale
Investment securities, held to maturity
Loans held for sale
Loans, net of allowance for loan losses of $19,412 and $18,882
Premises and equipment
Federal Reserve and Federal Home Loan Bank stock
Goodwill
Other intangible assets
Interest receivable
Cash value 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, $.01 par value, $1,000 liquidation value
Authorized, 1,000,000 Series B shares
Issued 12,500 and 12,500 shares
Common stock, $.3333 stated value
Authorized, 22,500,000 shares
Issued, 4,994,017 and 4,967,196 shares
Outstanding, 4,954,347 and 4,947,696 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to condensed consolidated financial statements
3
Condensed Consolidated Statements of Income
(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
Other Income
Service charges on deposit accounts
Wire transfer fees
Interchange fees
Fiduciary activities
Gain on sale of securities
Gain on sale of mortgage loans
Mortgage servicing income net of impairment
Increase in cash surrender value of bank owned life insurance
Other income
Total other income
Other Expenses
Salaries and employee benefits
Net occupancy expenses
Data processing
Professional fees
Outside services and consultants
Loan expense
FDIC insurance expense
Other losses
Other expenses
Total other expenses
Income Before Income Tax
Income tax expense
Net Income
Preferred stock dividend and discount accretion
Net Income Available to Common Shareholders
Basic Earnings Per Share
Diluted Earnings Per Share
4
Condensed Consolidated Statements of Comprehensive Income
Other Comprehensive Income
Change in fair value of derivative instruments, net of taxes
of $198 and $670, for 2012 and 2011, respectively
Unrealized appreciation on available-for-sale securities, net of taxes of $303 and $158, for 2012 and 2011, respectively
Less: reclassification adjustment for realized gains included in net income, net of taxes of $0 and $96, for 2012 and 2011, respectively
Comprehensive Income
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HORIZON BANCORP ANDSUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Balances, January 1, 2012
Net income
Other comprehensive income, net of tax
Amortization of unearned compensation
Stock option expense
Cash dividends on preferred stock (5.00%)
Cash dividends on common stock ($.13 per share)
Balances, March 31, 2012
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Condensed Consolidated Statements of Cash Flows
Operating Activities
Items not requiring (providing) cash
Depreciation and amortization
Share based compensation
Mortgage servicing rights impairment (recovery)
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 surrender 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
Purchase of securities held to maturity
Proceeds from maturities of securities held to maturity
Net change in loans
Proceeds on the sale of OREO and repossessed assets
Purchases of premises and equipment
Net cash provided (used in) by investing activities
Financing Activities
Proceeds from issuance of stock
Tax benefit from issuance of stock
Dividends paid on common shares
Dividends paid on preferred shares
Net cash used in financing activities
Net Change in Cash and Cash Equivalent
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
Additional Cash Flows Information
Interest paid
Income taxes paid
Transfer of loans to other real estate owned
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Notes to Condensed Consolidated Financial Statements
Note 1 – Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2012 and March 31, 2011 are not necessarily indicative of the operating results for the full year of 2012 or 2011. 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 2011 filed with the Securities and Exchange Commission on March 12, 2012. The consolidated condensed balance sheet of Horizon as of December 31, 2011 has been derived from the audited balance sheet of Horizon as of that date.
Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.
Three months ended
March 31
Basic earnings per share
Less: Preferred stock dividends and accretion of discount
Net income available to common shareholders
Weighted average common shares outstanding(1)
Diluted earnings per share
Effect of dilutive securities:
Warrants
Restricted stock
Stock options
Weighted average shares outstanding
Adjusted for 3:2 stock split on December 9, 2011
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At March 31, 2012 and 2011, there were 31,500 shares and 39,176 shares that 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, 2011 Annual Report on Form 10-K.
Reclassifications
Certain reclassifications have been made to the 2011 consolidated financial statements to be comparable to 2012. These reclassifications had no effect on net income.
Note 2 – 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, State and Municipal
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At March 31, 2012, 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 United States Department of the Treasury (“U.S. Treasury”) and federal agencies, securities of state and municipal governmental agencies, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The
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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 March 31, 2012.
The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2012 and December 31, 2011, 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
Held to maturity
Total held to maturity investment securities
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.
March 31, 2012
Total temporarily impaired securities
December 31, 2011
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Sales of securities available for sale (Unaudited)
Proceeds
Gross gains
Gross losses
Note 3 — Loans
Commercial
Working capital and equipment
Real estate, including agriculture
Other
Total
Real estate
1–4 family
Consumer
Auto
Recreation
Real estate/home improvement
Home equity
Unsecured
Mortgage warehouse
Total loans
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 higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the
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business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, which are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Real Estate and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Mortgage Warehousing
Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company the proceeds from the sale of the loan are received by Horizon and used to 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 is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon their outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchase an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the sales commitment and the mortgage company would not be able to repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
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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 mortgage
Residential construction
Total real estate
Direct installment
Direct installment purchased
Indirect installment
Total consumer
Net loans
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Note 4 – 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 two-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.
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 previously charged-off:
Total loan recoveries
Net loans charged-off
Provision charged to operating expense
Total provision charged to operating expense
Balance at the end of the period
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Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential 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, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Total ending loans balance
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Note 5 – Non-performing Loans and Impaired Loans
The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDR’s”) by class of loans:
Total Consumer
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
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the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when delinquent in excess of 90 days or have had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Operating Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when 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 TDR’s, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
The Company’s TDR’s are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2012, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of March 31, 2012, the Company had $5.6 million in TDR’s and $3.4 million were performing according to the restructured terms. The financial statement impact of non-perfoming TDR’s was not material for the three months ending March 31, 2012. There was $840,000 of specific reserves allocated to TDR’s at March 31, 2012 based on the collateral deficiencies.
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Loans classified as troubled debt restructuring during the three months ended March 31, 2012 and 2011, segregated by class, are shown in the table below.
Troubled debt restructured loans which had payment defaults during the three months ended March 31, 2012 and 2011, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual.
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The following table presents commercial loans individually evaluated for impairment by class of loans:
With no recorded allowance
With an allowance recorded
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The following table presents the payment status by class of 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.
Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
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For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO).
Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the COO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the COO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the COO however, lenders must present their factual information to either the Loan Committee or the COO when recommending an upgrade.
The COO meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.
Monthly, Senior Management attends the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, and collateral repossessions. The information reviewed in this meeting acts as a precursor for developing Management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.
For real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or a troubled debt restructure are graded “Substandard.” After being 90 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.
Horizon Bank employs an eight-grade rating system to determine the credit quality of commercial loans. The first four grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.
Risk Grade 1: Excellent (Pass)
Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2: Good (Pass)
Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.
Risk Grade 3: Satisfactory (Pass)
Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.
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Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:
At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;
At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.
The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.
During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.
Risk Grade 4: Satisfactory/Monitored (Pass)
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization.
Risk Grade 5: Special Mention
Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.
Risk Grade 6: Substandard
One or more of the following characteristics may be exhibited in loans classified Substandard:
Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.
Loans are inadequately protected by the current net worth and paying capacity of the obligor.
The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.
Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
Unusual courses of action are needed to maintain a high probability of repayment.
The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.
The lender is forced into a subordinated or unsecured position due to flaws in documentation.
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Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.
The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
There is a significant deterioration in market conditions to which the borrower is highly vulnerable.
Risk Grade 7: Doubtful
One or more of the following characteristics may be present in loans classified Doubtful:
Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.
The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.
Risk Grade 8: Loss
Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
23
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Note 6 – Derivative financial instruments
Cash Flow Hedges
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 5.63% on a notional amount of $30.5 million at March 31, 2012. Under these 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 the 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 March 31, 2012, the Company’s cash flow hedge was effective and is not expected to have a significant impact 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 activities. 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 March 31, 2012, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.
The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective, and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $47.6 million at March 31, 2012.
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 March 31, 2012, the Company’s fair value of these derivatives was recorded and over the next 12 months is not expected to have a significant impact on the Company’s net income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.
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The following tables summarize the fair value of derivative financial instruments utilized by Horizon Bancorp:
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
The effect of the derivative instruments on the consolidated statement of income for the three-month periods ending is as follows:
Derivative in cash flow
hedging relationship
FASB Accounting Standards Codification (“ASC”) Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
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Derivative in fair value
Location of gain (loss)
recognized on derivative
Derivative not designated as
Mortgage contracts
Note 7 – Disclosures about fair value of assets and liabilities
The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:
Level 1
Level 2
Level 3
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available for sale securities
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.
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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, therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
Available-for-sale securities
Total available-for-sale securities
Forward sale commitments
Commitments to originate loans
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Transfers between Levels
Transfers between Levels 1, 2 and 3 and the reasons for those transfers are as follows:
Transfers to level:
Total transfers to level
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheet using significant unobservable (Level 3) inputs (Unaudited):
Beginning balance December 31, 2011
Total realized and unrealized gains and losses
Included in net income
Included in other comprehensive income, gross
Purchases, issuances, and settlements
Principal payments
Transfers out to Level 2
Ending balance March 31, 2012
Beginning balance December 31, 2010
Ending balance March 31, 2011
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Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:
Total gains and losses from:
Fair value interest rate swap agreements
Derivative loan commitments
Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
Impaired loans
Mortgage servicing rights
Impaired (collateral dependent): Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property, including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third-party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company's other real estate owned is determined using Level 3 inputs, which include current and prior appraisals net of estimated costs to sell. Fair value adjustments on impaired loans were $2.8 million at March 31, 2012 and $2.1 million at December 31, 2012.
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.
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Note 8 – 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 March 31, 2012 and December 31, 2011. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due from Banks — The carrying amounts approximate fair value.
Held-to-Maturity Securities — For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.
Loans Held for Sale — The carrying amounts approximate fair value.
Net Loans— The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.
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 Letter of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the
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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).
Assets
Investment securities held to maturity
Stock in FHLB and FRB
Non-interest bearing deposits
Interest-bearing deposits
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Note 9 – Other Comprehensive Income
Unrealized gains on securities:
Unrealized holding gains arising during the period
Less: reclassification adjustment for gains realized in net income
Unrealized gain on derivative instruments
Net unrealized gains
Tax expense (benefit)
Other comprehensive income
Unrealized gain on securities available for sale
Unrealized gain (loss) on derivative instruments
Tax effect
Total accumulated other comprehensive income
Note 10 – Future accounting matters
Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company is assessing the impact of ASU 2011-11 on its disclosures.
Goodwill: In September 2011, the FASB issued ASU No. 2011-08 “Intangibles — Goodwill and Other (Topic 350)—Testing Goodwill for Impairment.” ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The Company does not expect an impact on its financial condition or results of operations.
Comprehensive Income: In June 2011, the FASB issued ASU No. 2011-05“Comprehensive Income (Topic 220)—Presentation of Comprehensive Income.” ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In December 2011, FASB issued ASU No. 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present items that arereclassified from accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. ASU 2011-05 was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The effect of applying this standard is reflected in the Condensed Consolidated Statement of Comprehensive Income.
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Fair Value Measurements: In May 2011, the FASB issued ASU No. 2011-04“Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 was effective prospectively during interim and annual periods beginning on or after December 15, 2011. Early application by public entities was not permitted. The effect of applying this standard is included in Note 7.
Transfers and Servicing: In April 2011, the FASB issued ASU No. 2011-03“Transfers and Servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreement.” ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date. Early adoption was not permitted. ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or disclosures.
Note 11 – Business Combination
On February 9, 2012, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Heartland Bancshares, Inc., an Indiana corporation (“Heartland”). Pursuant to the Merger Agreement, Heartland will merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Heartland Community Bank, an Indiana-chartered commercial bank and wholly owned subsidiary of Heartland, will merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.
The boards of directors of each of Horizon and Heartland have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Heartland’s shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger at the end of the second quarter or beginning of the third quarter of 2012.
In connection with the Merger, each Heartland shareholder will receive 0.54 shares of Horizon common stock (the “Exchange Ratio”) for each share of Heartland common stock owned by them, subject to adjustment as described below. Based on Horizon’s February 8, 2012 closing price of $18.00 per share as reported on the NASDAQ Global Market, the transaction value is estimated at $14.0 million.
The Exchange Ratio may be adjusted in the manner prescribed in the Merger Agreement based upon (i) Heartland’s consolidated shareholder’s equity as of the end of the month prior to closing of the Merger, (ii) the closing of certain commercial loans prior to the closing of the Merger, (iii) a significant decrease in Horizon’s common stock price, and (iv) certain other circumstances specified by the Merger Agreement.
The Merger Agreement also provides that prior to the merger Horizon will fund the purchase by either Horizon or Heartland of the shares of preferred stock with an aggregate liquidation value of $7.248 million that Heartland issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program. The Merger Agreement contains other customary representations, warranties, and covenants of Horizon and Heartland.
Subject to certain terms and conditions, the board of directors of Heartland has agreed to recommend the approval and adoption of the Merger Agreement to the Heartland shareholders and will solicit proxies voting in favor of the Merger from Heartland’s shareholders.
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The Merger Agreement also provides for certain termination rights for both Horizon and Heartland, and further provides that upon termination of the Merger Agreement under certain circumstances, Heartland will be obligated to pay Horizon a termination fee.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months Ended March 31, 2012
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, and 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 not limited to:
the use of proceeds of future offerings of securities;
the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;
changes in competitive conditions;
the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;
changes in customer borrowing, repayment, investment and deposit practices;
changes in fiscal, monetary and tax policies;
changes in financial and capital markets;
deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration;
capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities;
risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations;
factors that may cause the Company to incur impairment charges on its investment securities;
the impact, extent and timing of technological changes
electronic, cyber and physical security breaches;
claims and litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;
actions of the Federal Reserve Board;
changes in accounting principles and interpretations;
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potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary;
actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms;
the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; and
other factors and risks described under the caption “Risk Factors” in this report and in any of our subsequent reports that we have made or make with the Securities and Exchange Commission (“SEC”).
Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2011 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 Northwestern Indiana and Southwestern Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s Common Stock is traded on the NASDAQ Global Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.
Horizon continues to operate in a challenging economic and banking environment. Within the Company’s primary market areas of Northwest Indiana and Southwest Michigan, unemployment rates increased during 2009 and have remained at high levels during 2010, 2011 and through the first three months of 2012. This rise in unemployment has been driven by multiple factors including slowdowns in the steel and recreational vehicle industries as well as a continued lower activity in the housing industry. The Company’s higher than historical levels of non-performing loans at March 31, 2012 and over the past two years can be attributed to the continued slow economy and continued high local unemployment, which have resulted in lower business revenues and increased bankruptcies. Despite these economic factors, Horizon continued to post record positive results through the first three months of 2012.
Following are some highlights of Horizon’s financial performance through the first quarter of 2012:
First quarter 2012 net income was $4.6 million or $.88 diluted earnings per share, a 79% increase in diluted earnings per share compared to the same period in 2011 and a 29% increase compared to the most recent linked quarter. In addition, this represents the highest quarterly net income and diluted earnings per share in the Company’s history.
Total loans increased $5.4 million during the quarter and $179.0 million over the previous twelve months to $988.6 million at March 31, 2012.
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Net interest income, after provisions for loan losses, for the first three months of 2012 was $12.6 million compared with $9.5 million for the same period in the prior year.
The provision for loan losses decreased to $559,000 for the first three months of 2012 compared to $1.5 million for the same period in 2011 and $838,000 for the most recent linked quarter.
Net charge-offs for the first three months of 2012 were $29,000 compared to $1.5 million for the same period in 2011 and $1.1 million for the most recent linked quarter.
Return on average assets was 1.23% for the first quarter of 2012.
Return on average common equity was 15.90% for the first quarter of 2012.
Announced the definitive agreement to acquire Heartland Bancshares, Inc (“Heartland”) based in Franklin, Indiana.
The Company increased its quarterly cash dividend in the first quarter of 2012 to $.13 and paid its 105th consecutive quarterly dividend to shareholders.
Horizon’s tangible book value per share rose to $21.35 compared with $18.11 at March 31, 2011.
Horizon Bank’s capital ratios, including Tier 1 Capital to total risk weighted assets of 11.77% as of March 31, 2012, continue to be well above the regulatory standards for well-capitalized banks.
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2011 contain a summary of the Company's significant accounting policies. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses, intangible assets, mortgage servicing rights and hedge accounting as critical accounting policies.
Allowance for Loan Losses
An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2012, Horizon had core deposit intangibles of $2.2 million subject to amortization and $5.9 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350-10 requires
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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 March 31, 2012 was $18.50 per share compared to a book value of $22.99 per common share. Horizon reported record earnings for the twelfth consecutive year in 2011 and the first three months of 2012 were the highest first three months of net income in the Company’s history, therefore, the Company believes the below book market price relates to an overall decline in the financial industry sector and is not specific to Horizon.
The financial markets are currently reflecting significantly lower valuations for the stocks of financial institutions, when compared to historic valuation metrics, largely driven by the constriction in available credit and losses suffered related to residential mortgage markets. The Company’s stock activity, as well as the price, has been affected by the economic conditions affecting the banking industry. Management believes this downturn has impacted the Company’s stock and has concluded that the recent stock price is not indicative or reflective of fair value (per ASC Topic 820 Fair Value).
Horizon has concluded that, based on its own internal evaluation the recorded, value of goodwill is not impaired.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
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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.
Financial Condition
On March 31, 2012, Horizon’s total assets were $1.5 billion, primarily unchanged from December 31, 2011.
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Investment securities were comprised of the following as of:
Investment securities increased by approximately $2.5 million compared to the end of 2011. This growth was the result of the Company deploying excess cash that was held during the first three months in cash and due from banks into investment securities.
Net loans increased $4.8 million since December 31, 2011. This increase was the result of an increase in consumer and mortgage warehouse loans of $4.0 million and $4.9 million, respectively. These increases were offset by a decrease in commercial and real estate loans of $1.9 million and $1.6 million, respectively. The increase in consumer loans is the direct result of increased calling efforts and market expansion allowing opportunities to increase Horizon’s market share within the Company’s footprint. Mortgage warehouse loans increased as a result of market expansion and refinancing activity. Horizon’s commercial loans decreased during the first three months of 2012 as new loan production has not completely replaced all of the loan run-off from scheduled amortization and pay-offs along with exiting several substandard relationships.
Other assets decreased $3.7 million during the first three months of 2012 primarily due to a $2.0 million decrease in OREO.
Total deposits increased $54.8 million during the first three months of 2012 primarily due to municipal deposit growth.
The Company’s borrowings decreased $59.2 million since December 31, 2011. At March 31, 2012 the Company had $106.0 million in short-term funds borrowed compared to $157.0 million at December 31, 2011. The Company uses short-term borrowings to fund the increase in mortgage warehouse lending when it is determined that the loan demand may fluctuate as a result of refinancing activity. In addition, the current Company’s balance sheet strategy is to utilize a reasonable level of short-term borrowing during extended low rate environments in addition to what is needed for the fluctuations in mortgage warehouse lending.
Stockholders’ equity totaled $126.2 million at March 31, 2012 compared to $121.5 million at December 31, 2011. The increase in stockholders’ equity during the period was the result of generating net income and an increase in accumulated other comprehensive income, net of dividends declared. At March 31, 2012, the ratio of average stockholders’ equity to average assets was 8.33% compared to 7.96% for December 31, 2011. Book value per common share at March 31, 2012 increased to $22.99 compared to $22.02 at December 31, 2011.
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Results of Operations
Consolidated net income for the three-month period ended March 31, 2012 was $4.6 million, an increase of 66.8% from the $2.8 million for the same period in 2011. Earnings per common share for the three months ended March 31, 2012 increased to $0.90 basic and $0.88 diluted, compared to $0.51 basic and $0.49 diluted for the same three-month period in 2011. Dividends paid on preferred shares reduced diluted earnings per share by $0.03 and $0.08 per share for the three-month periods ended March 31, 2012 and 2011, respectively.
The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread which affects the net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
The reduction in interest rates has influenced the cost of the Company’s interest bearing liabilities more significantly than the reduction in the yields received on the Company’s interest earning assets, resulting in an increase of the net interest margin. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.
Net interest income during the three months ended March 31, 2012 was $13.2 million, an increase of $2.1 million over the $11.1 million earned during the same period in 2011. Yields on the Company’s interest-earning assets decreased by 2 basis points to 4.91% from 4.93% for the three months ended March 31, 2012 and 2011, respectively. Interest income increased $1.4 million from $15.4 million for the three months ended March 31, 2011 to $16.8 million for the same period in 2012. This increase was primarily due to an increase in interest earning assets offset slightly from the yield on new and repriced earning assets. However, the asset yields on loans receivable has not declined at the same pace as some market indices partially due to interest rate floors that are in place on approximately $387.1 million of the Company’s $520.5 million of adjustable rate loans.
Rates paid on interest-bearing liabilities decreased by 34 basis points for the three months ended March 31, 2012 compared to the same period in 2011 due to the lower interest rate environment. Interest expense decreased $736,000 from $4.4 million for the three-months ended March 31, 2011 to $3.6 million for the same period in 2012. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities. Due to a more significant decrease in the rates paid on the Company’s interest-bearing liabilities compared to the decrease in yields received on the Company’s interest-earning assets the net interest margin increased 30 basis points from 3.57% for the three months ended March 31, 2011 to 3.87% for the same period in 2012.
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The following are the average balance sheets for the three months ending:
ASSETS
Interest-earning assets
Federal funds sold
Interest-earning deposits
Investment securities - taxable
Investment securities - non-taxable (1)
Loans receivable (2)(3)(4)
Total interest-earning assets (1)
Noninterest-earning assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Total interest-bearing liabilities
Noninterest-bearing liabilities
Demand deposits
Accrued interest payable and other liabilities
Shareholders’ equity
Net interest income/spread
Net interest income as a percent of average interest earning assets (1)
Provision for Loan Losses
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolios. During the first quarter of 2012, a provision for loan losses of $559,000 was required to adequately fund the ALLL compared to a provision of $1.5 million for the first quarter of 2011. The provision for the current quarter was the amount required to bring the ALLL to the amount determined to be adequate. Commercial loans had net recoveries during the first quarter of 2012 of $332,000, residential mortgage loans had net charge-offs of $59,000 and consumer loans had net charge-offs of $302,000. The ALLL balance at March 31, 2012 was $19.4 million or 1.94% of total loans. This compares to an ALLL balance of $18.9 million at December 31, 2011 or 1.89% of total loans and $19.1 million at March 31, 2011 or 2.34% of total loans.
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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 March 31, 2012.
Non-performing loans totaled $21.1 million on March 31, 2012, up from $20.1 million on December 31, 2011, and down from $22.1 million on March 31, 2011. As a percentage of total loans, non-performing loans were 2.11% on March 31, 2012, up from 2.02% on December 31, 2011, and down from 2.71% on March 31, 2011.
The increase of non-performing loans in the first quarter of 2012 from the prior quarter was primarily due to an increase of non-performing commercial loans from $8.0 million on December 31, 2011 to $9.0 million on March 31, 2012. Non-performing mortgage loans increased from $8.5 million on December 31, 2011 to $8.7 million on March 31, 2012. Non-performing consumer loans declined from $3.7 million on December 31, 2011 to $3.4 million on March 31, 2012.
Non-accrual loans, excluding non-accrual troubled debt resturcturings, were $15.5 million on March 31, 2012, up from $14.4 million on December 31, 2011, but down from $17.4 million on March 31, 2011. Loans 90 days delinquent but still on accrual totaled $29,000 on March 31, 2012, down from $37,000 on December 31, 2011, and $57,000 on March 31, 2011. Loans 30 to 89 days delinquent declined to $2.93 million in first quarter 2012 compared with $3.28 million at December 31, 2011 and $6.95 million at March 31, 2011. At .30% of total loans, this represents the lowest levels of loans 30-89 days delinquent since 2007.
Other Real Estate Owned (OREO) totaled $803,000 on March 31, 2012, down from $2.8 million on December 31, 2011, and $2.3 million on March 31, 2011. During the quarter, 15 properties with a book value of $2.1 million as of December 31, 2011 were sold. Only one property with a book value of $137,000 was transferred into OREO. No write downs on OREO occurred during the quarter.
The following is a summary of changes in other income:
Gain (loss) on sale of securities
Mortgage servicing net of impairment
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Service charges on deposit accounts were $83,000 lower during the first quarter of 2012 compared to the same period in 2011 primarily due to the regulatory changes on overdraft fees. The residential mortgage loan activity during the first quarter of 2012 generated $2.3 million of income from the gain on sale of mortgage loans, up $1.7 million from the same period in 2011. This increase was primarily due to more favorable pricing on loans sold and additional volume. Loans originated for sale during the first quarter of 2012 were $80.3 million compared to $64.2 million for the same period in 2011. However, during the first quarter of 2011, the Company recovered $701,000 of impairment on the Company’s mortgage servicing asset.
Other Expense
The following is a summary of changes in other expense:
Salaries
Commission and bonuses
Employee benefits
FDIC deposit insurance
Total other expense
Total other expenses were $902,000 higher in the first quarter of 2012 compared to the first quarter of 2011. Salaries, commissions and bonuses, and employee benefits increased $602,000 compared to the same quarter in 2011. This increase is the result of annual merit pay increases and higher commission and bonus expense based on the first quarter performance for 2012. FDIC deposit insurance expense decreased during the first quarter of 2012 compared to 2011 as the new assessment calculation resulted in lower expense for the Bank. Included in the first quarter of 2012’s professional fees, outside services and consultants and other expenses was $168,000 of transaction costs related to the Heartland merger.
Income Taxes
Income tax expense for the first quarter of 2012 was $2.0 million compared to $810,000 of tax expense for the first quarter of 2011. The effective tax rate for the first quarter of 2012 was 30.3% compared to 22.7% in 2011. The increase in the effective tax rate is primarily due to higher income before income tax for the first quarter of 2012 compared to the same period in 2011 with a similar level of tax exempt income.
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
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the FHLB. During the three months ended March 31, 2012, cash and cash equivalents decreased by approximately $1.4 million. At March 31, 2012, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $333.4 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window at March 31, 2012 compared to $288.7 million at December 31, 2011 and $302.6 million at March 31, 2011.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2012. Stockholders’ equity totaled $126.2 million as of March 31, 2012, compared to $121.5 million as of December 31, 2011. At March 31, 2012, the quarter’s ratio of average stockholders’ equity to average assets was 8.33% compared to 7.96% at December 31, 2011. Horizon’s capital increased during the three months as a result of increased earnings and an increase in accumulated other comprehensive income, net of dividends declared and the amortization of unearned compensation.
The Company currently intends to continue its participation in the Small Business Lending Fund, pursuant to which it issued preferred stock to the US Treasury, since the growth in the Company’s small business lending has reduced the dividend cost. For the three months ending March 31, 2012, the dividend cost was approximately $156,000, or 5.0% annualized. For the second quarter of 2012 the dividend cost will be approximately $106,000, or 3.4% annualized and for the third quarter of 2012 the dividend cost will be approximately $62,500, or 2.0% annualized. The Company plans to reserve cash for the ability to redeem this preferred stock if and when the cost of this capital exceeds other forms of capital.
Horizon declared common dividends in the amount of $0.13 per share during the first three months of 2012 compared to $0.11 for the same period of 2011. The dividend payout ratio (dividends as a percent of basic earnings per share) was 14.4% and 22.42% for the first three months of 2012 and 2011, respectively. For additional information regarding dividend conditions, see Horizon’s Annual Report on Form 10-K for 2011.
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Quantitative and Qualitative Disclosures About Market Risk
Refer to Horizon’s 2011 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 2011 Annual Report on Form 10-K.
Evaluation Of Disclosure Controls And Procedures
Based on an evaluation of disclosure controls and procedures as of March 31, 2012, 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 March 31, 2012, 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.
An investment in Horizon’s securities is subject to risks inherent to our business. The material risks and uncertainties that management believes currently affect Horizon are described below. Before making an investment decision, you should carefully consider these risks as well as information we include or incorporate by reference in this report and other filings we make with the SEC. The risks and uncertainties we have described are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.
If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, our results could differ materially from the forward-looking statements. All forward-looking statements in this report are current only as of the date on which the statements were made. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.
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.
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INDEX TO EXHIBITS
Exhibit No.
Description
Location
2.1
3.1
10.1
10.2
10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 101
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