Form 10-Q HORIZON BANCORP /IN/ For: Mar 31

Table of Contents

 

 

HORIZON BANCORP

FORM 10-Q

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

Commission file number 0-10792

 

 

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

Indiana		35-1562417
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
515 Franklin Square, Michigan City, Indiana		46360
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (219) 879-0211

Former name, former address and former fiscal year, if changed since last report: N/A

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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):

 

Large Accelerated Filer		¨		Accelerated Filer		x
Non-accelerated Filer		¨  Do not check if smaller reporting company		Smaller Reporting Company		¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,232,163 shares of Common Stock, no par value, at May 1, 2015.

 

 

 

---

Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets			3
		Condensed Consolidated Statements of Income			4
		Condensed Consolidated Statements of Comprehensive Income			5
		Condensed Consolidated Statement of Stockholders’ Equity			6
		Condensed Consolidated Statements of Cash Flows			7
		Notes to Condensed Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			53
Item 4.		Controls and Procedures			53
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			54
Item 1A.		Risk Factors			54
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3.		Defaults Upon Senior Securities			54
Item 4.		Mine Safety Disclosures			54
Item 5.		Other Information			54
Item 6.		Exhibits			55
Signatures
Index To Exhibits

 

2

---

Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

		March 31				December 31
		2015				2014
		(Unaudited)
Assets
Cash and due from banks		$	38,676			$	43,476
Investment securities, available for sale			331,033				323,764
Investment securities, held to maturity (fair value of $171,405 and $169,904)			164,282				165,767
Loans held for sale			6,229				6,143
Loans, net of allowance for loan losses of $16,634 and $16,501			1,444,725				1,362,053
Premises and equipment, net			53,989				52,461
Federal Reserve and Federal Home Loan Bank stock			11,348				11,348
Goodwill			28,176				28,176
Other intangible assets			3,738				3,965
Interest receivable			8,431				8,246
Cash value of life insurance			39,640				39,382
Other assets			23,698				32,141
Total assets		$	2,153,965			$	2,076,922
Liabilities
Deposits
Non-interest bearing		$	285,181			$	267,667
Interest bearing			1,179,915				1,214,652
Total deposits			1,465,096				1,482,319
Borrowings			440,415				351,198
Subordinated debentures			32,680				32,642
Interest payable			504				497
Other liabilities			15,779				15,852
Total liabilities			1,954,474				1,882,508
Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 12,500 shares			12,500				12,500
Common stock, no par value Authorized, 22,500,000 shares Issued, 9,289,916 and 9,278,916 shares Outstanding, 9,232,163 and 9,213,036 shares			—				—
Additional paid-in capital			46,064				45,916
Retained earnings			138,500				134,477
Accumulated other comprehensive income			2,427				1,521
Total stockholders’ equity			199,491				194,414
Total liabilities and stockholders’ equity		$	2,153,965			$	2,076,922

See notes to condensed consolidated financial statements

 

3

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

		Three Months Ended
		March 31
		2015				2014
		(Unaudited)				(Unaudited)
Interest Income
Loans receivable		$	16,862			$	12,954
Investment securities
Taxable			2,154				2,390
Tax exempt			1,077				1,123
Total interest income			20,093				16,467
Interest Expense
Deposits			1,232				1,277
Borrowed funds			1,479				1,422
Subordinated debentures			496				496
Total interest expense			3,207				3,195
Net Interest Income			16,886				13,272
Provision for loan losses			614				—
Net Interest Income after Provision for Loan Losses			16,272				13,272
Non-interest Income
Service charges on deposit accounts			999				923
Wire transfer fees			151				112
Interchange fees			1,102				959
Fiduciary activities			1,297				1,048
Gain on sale of investment securities (includes $124 and $0 for the three months ended March 31, 2015 and 2014, respectively, related to accumulated other comprehensive earnings reclassifications)			124				—
Gain on sale of mortgage loans			2,379				1,411
Mortgage servicing income net of impairment			179				207
Increase in cash value of bank owned life insurance			258				233
Death benefit on bank owned life insurance			145				—
Other income			432				629
Total non-interest income			7,066				5,522
Non-interest Expense
Salaries and employee benefits			8,504				7,483
Net occupancy expenses			1,551				1,424
Data processing			923				870
Professional fees			527				608
Outside services and consultants			626				661
Loan expense			1,257				1,015
FDIC insurance expense			337				256
Other losses			(45	)			38
Other expense			2,388				2,159
Total non-interest expense			16,068				14,514
Income Before Income Tax			7,270				4,280
Income tax expense (includes $43 and $0 for the three months ended March 31, 2015 and 2014, respectively, related to income tax expense from reclassification items)			1,912				863
Net Income			5,358				3,417
Preferred stock dividend			(31	)			(31	)
Net Income Available to Common Shareholders		$	5,327			$	3,386
Basic Earnings Per Share		$	0.58			$	0.39
Diluted Earnings Per Share			0.55				0.38

See notes to condensed consolidated financial statements

 

4

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

 

		Three Months Ended March 31
		2015				2014
		(Unaudited)				(Unaudited)
Net Income		$	5,358			$	3,417
Other Comprehensive Income
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period			(329	)			(225	)
Income tax effect			115				79
Changes from derivative instruments			(214	)			(146	)
Change in securities available-for-sale:
Unrealized appreciation for the period on available-for-sale securities			1,962				4,426
Unrealized appreciation for the period on held-to-maturity			(114	)			—
Reclassification adjustment for securities gains realized in income			(124	)			—
Income tax effect			(604	)			(1,550	)
Unrealized gains on available-for-sale securities			1,120				2,876
Other Comprehensive Income, Net of Tax			906				2,730
Comprehensive Income		$	6,264			$	6,147

See notes to condensed consolidated financial statements

 

5

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

 

		Preferred Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
Balances, January 1, 2015		$	12,500			$	45,916			$	134,477			$	1,521			$	194,414
Net income											5,358								5,358
Other comprehensive income, net of tax															906				906
Amortization of unearned compensation							89												89
Stock option expense							59												59
Cash dividends on preferred stock (1.00%)											(31	)							(31	)
Cash dividends on common stock ($.14 per share)											(1,304	)							(1,304	)
Balances, March 31, 2015		$	12,500			$	46,064			$	138,500			$	2,427			$	199,491

See notes to condensed consolidated financial statements

 

6

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

		Three Months Ended March 31
		2015				2014
		(Unaudited)				(Unaudited)
Operating Activities
Net income		$	5,358			$	3,417
Items not requiring (providing) cash
Provision for loan losses			614				—
Depreciation and amortization			956				844
Share based compensation			59				27
Mortgage servicing rights net (recovery) impairment			414				(5	)
Premium amortization on securities available for sale, net			476				549
Gain on sale of investment securities			(124	)			—
Gain on sale of mortgage loans			(2,379	)			(1,411	)
Proceeds from sales of loans			71,211				35,348
Loans originated for sale			(68,918	)			(35,991	)
Change in cash value of life insurance			(258	)			(233	)
Gain on sale of other real estate owned			(263	)			(218	)
Net change in
Interest receivable			(185	)			(35	)
Interest payable			7				(8	)
Other assets			5,503				675
Other liabilities			(1,287	)			(1,138	)
Net cash provided by operating activities			11,184				1,821
Investing Activities
Purchases of securities available for sale			(30,406	)			(27,290	)
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale			25,260				20,327
Proceeds from maturities of securities held to maturity			735				—
Net change in loans			(81,515	)			(32,259	)
Proceeds on the sale of OREO and repossessed assets			1,414				784
Purchases of premises and equipment			(2,168	)			(1,394	)
Purchase of Mortgage Company			—				(735	)
Net cash used in investing activities			(86,680	)			(40,567	)
Financing Activities
Net change in
Deposits			(17,224	)			64,051
Borrowings			89,255				(20,214	)
Dividends paid on common shares			(1,304	)			(961	)
Dividends paid on preferred shares			(31	)			(31	)
Net cash provided by financing activities			70,696				42,845
Net Change in Cash and Cash Equivalents			(4,800	)			4,099
Cash and Cash Equivalents, Beginning of Period			43,476				31,721
Cash and Cash Equivalents, End of Period		$	38,676			$	35,820
Additional Supplemental Information
Interest paid		$	3,199			$	3,203
Income taxes paid			—				—
Transfer of loans to other real estate owned			(772	)			610

See notes to condensed consolidated financial statements

 

7

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 – Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2015 and March 31, 2014 are not necessarily indicative of the operating results for the full year of 2015 or 2014. 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 2014 filed with the Securities and Exchange Commission on March 13, 2015. The condensed consolidated balance sheet of Horizon as of December 31, 2014 has been derived from the audited balance sheet 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
		2015				2014
		(Unaudited)				(Unaudited)
Basic earnings per share
Net income		$	5,358			$	3,417
Less: Preferred stock dividends			31				31
Net income available to common shareholders		$	5,327			$	3,386
Weighted average common shares outstanding			9,216,011				8,630,966
Basic earnings per share		$	0.58			$	0.39
Diluted earnings per share
Net income available to common shareholders		$	5,327			$	3,386
Weighted average common shares outstanding			9,216,011				8,630,966
Effect of dilutive securities:
Warrants			321,652				311,278
Restricted stock			30,510				39,519
Stock options			41,333				40,023
Weighted average shares outstanding			9,609,506				9,021,786
Diluted earnings per share		$	0.55			$	0.38

At March 31, 2015 and 2014, there were 62,445 and no shares, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

8

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2014 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2014 condensed consolidated financial statements to be comparable to 2015. These reclassifications had no effect on net income.

Note 2 – Acquisition

On April 3, 2014 Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). The Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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

 

 

9

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Of the total estimated purchase price of $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.

The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The Company acquired the $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of April 3, 2014.

 

Contractually required principal and interest at acquisition		$	14,460
Contractual cash flows not expected to be collected (nonaccretable differences)			3,146
Expected cash flows at acquisition			11,314
Interest component of expected cash flows (accretable discount)			1,688
Fair value of acquired loans accounted for under ASC 310-30		$	9,626

Pro-forma statements were not presented due to the materiality of the transaction.

 

10

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 3 – Securities

The fair value of securities is as follows:

 

						Gross				Gross
March 31, 2015		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
Available for sale
U.S. Treasury and federal agencies		$	28,400			$	69			$	(48	)		$	28,421
State and municipal			50,036				1,577				(37	)			51,576
Federal agency collateralized mortgage obligations			120,785				1,471				(537	)			121,719
Federal agency mortgage-backed pools			125,923				3,590				(246	)			129,267
Corporate notes			32				18				—				50
Total available for sale investment securities		$	325,176			$	6,725			$	(868	)		$	331,033
Held to maturity
U.S. Treasury and federal agencies		$	9,824			$	157			$	—			$	9,981
State and municipal			128,558				6,179				(143	)			134,594
Federal agency collateralized mortgage obligations			3,873				45				—				3,918
Federal agency mortgage-backed pools			22,027				961				(76	)			22,912
Total held to maturity investment securities		$	164,282			$	7,342			$	(219	)		$	171,405
December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available for sale
U.S. Treasury and federal agencies		$	26,996			$	56			$	(229	)		$	26,823
State and municipal			46,535				1,462				(45	)			47,952
Federal agency collateralized mortgage obligations			122,930				975				(1,045	)			122,860
Federal agency mortgage-backed pools			122,583				3,172				(360	)			125,395
Private labeled mortgage-backed pools			670				19				—				689
Corporate notes			32				13				—				45
Total available for sale investment securities		$	319,746			$	5,697			$	(1,679	)		$	323,764
Held to maturity
U.S. Treasury and federal agencies		$	9,804			$	82			$	—			$	9,886
State and municipal			129,595				3,398				(106	)			132,887
Federal agency collateralized mortgage obligations			4,039				35				(1	)			4,073
Federal agency mortgage-backed pools			22,329				729				—				23,058
Total held to maturity investment securities		$	165,767			$	4,244			$	(107	)		$	169,904

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

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At March 31, 2015, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the

 

11

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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, 2015.

The Company elected to transfer 319 available-for-sale (“AFS”) securities with an aggregate fair value of $167.1 million to a classification of held-to-maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income, with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2015 and December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		March 31, 2015								December 31, 2014
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Available for sale
Within one year		$	6,170			$	6,220			$	6,098			$	6,169
One to five years			49,096				49,902				44,720				45,093
Five to ten years			16,830				17,373				16,147				16,768
After ten years			6,372				6,552				6,598				6,790
			78,468				80,047				73,563				74,820
Federal agency collateralized mortgage obligations			120,785				121,719				122,930				122,860
Federal agency mortgage-backed pools			125,923				129,267				122,583				125,395
Private labeled mortgage-backed pools			—				—				670				689
Total available for sale investment securities		$	325,176			$	331,033			$	319,746			$	323,764
Held to maturity
Within one year		$	—			$	—			$	—			$	—
One to five years			1,223				1,243				592				593
Five to ten years			104,305				109,391				99,225				101,323
After ten years			32,854				33,941				39,582				40,857
			138,382				144,575				139,399				142,773
Federal agency collateralized mortgage obligations			3,873				3,918				4,039				4,073
Federal agency mortgage-backed pools			22,027				22,912				22,329				23,058
Total held to maturity investment securities		$	164,282			$	171,405			$	165,767			$	169,904

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.

 

12

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
March 31, 2015		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury and federal agencies		$	—			$	—			$	16,937			$	(48	)		$	16,937			$	(48	)
State and municipal			15,766				(173	)			1,259				(7	)			17,025				(180	)
Federal agency collateralized mortgage obligations			9,233				(21	)			29,821				(516	)			39,054				(537	)
Federal agency mortgage-backed pools			6,847				(84	)			27,253				(238	)			34,100				(322	)
Total temporarily impaired securities		$	31,846			$	(278	)		$	75,270			$	(809	)		$	107,116			$	(1,087	)
		Less than 12 Months								12 Months or More								Total
December 31, 2014		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. Treasury and federal agencies		$	2,993			$	(7	)		$	20,762			$	(222	)		$	23,755			$	(229	)
State and municipal			10,287				(121	)			2,050				(30	)			12,337				(151	)
Federal agency collateralized mortgage obligations			15,013				(88	)			39,801				(957	)			54,814				(1,045	)
Federal agency mortgage-backed pools			5,993				(9	)			28,044				(351	)			34,037				(360	)
Total temporarily impaired securities		$	34,286			$	(225	)		$	90,657			$	(1,560	)		$	124,943			$	(1,785	)

 

		Three Months Ended March 31
		2015				2014
Sales of securities available for sale (Unaudited)
Proceeds		$	13,332			$	—
Gross gains			147				—
Gross losses			(23	)			—

Note 4 – Loans

 

		March 31				December 31
		2015				2014
Commercial
Working capital and equipment		$	311,789			$	300,940
Real estate, including agriculture			354,356				343,455
Tax exempt			8,890				8,595
Other			20,701				21,324
Total			695,736				674,314
Real estate
1–4 family			256,809				250,799
Other			3,581				3,826
Total			260,390				254,625
Consumer
Auto			160,668				154,538
Recreation			5,645				5,673
Real estate/home improvement			38,371				38,288
Home equity			112,180				112,426
Unsecured			3,437				3,613
Other			6,033				5,921
Total			326,334				320,459
Mortgage warehouse			178,899				129,156
Total loans			1,461,359				1,378,554
Allowance for loan losses			(16,634	)			(16,501	)
Loans, net		$	1,444,725			$	1,362,053

 

13

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage 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 a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchase an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the

 

14

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

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

 

		Loan								Deferred				Recorded
March 31, 2015		Balance				Interest Due				Fees / (Costs)				Investment
Owner occupied real estate		$	240,027			$	426			$	658			$	241,111
Non owner occupied real estate			308,420				345				515				309,280
Residential spec homes			3,409				5				3				3,417
Development & spec land loans			11,229				28				25				11,282
Commercial and industrial			131,422				828				28				132,278
Total commercial			694,507				1,632				1,229				697,368
Residential mortgage			244,081				743				546				245,370
Residential construction			15,763				22				—				15,785
Mortgage warehouse			178,899				480				—				179,379
Total real estate			438,743				1,245				546				440,534
Direct installment			41,476				135				(380	)			41,231
Direct installment purchased			195				—				—				195
Indirect installment			146,938				302				—				147,240
Home equity			138,458				557				(353	)			138,662
Total consumer			327,067				994				(733	)			327,328
Total loans			1,460,317				3,871				1,042				1,465,230
Allowance for loan losses			(16,634	)			—				—				(16,634	)
Net loans		$	1,443,683			$	3,871			$	1,042			$	1,448,596

 

		Loan								Deferred				Recorded
December 31, 2014		Balance				Interest Due				Fees / (Costs)				Investment
Owner occupied real estate		$	228,380			$	385			$	680			$	229,445
Non owner occupied real estate			297,299				309				506				298,114
Residential spec homes			2,027				2				—				2,029
Development & spec land loans			12,097				28				30				12,155
Commercial and industrial			133,256				859				39				134,154
Total commercial			673,059				1,583				1,255				675,897
Residential mortgage			242,521				737				599				243,857
Residential construction			11,505				21				—				11,526
Mortgage warehouse			129,156				480				—				129,636
Total real estate			383,182				1,238				599				385,019
Direct installment			40,137				129				(375	)			39,891
Direct installment purchased			219				—				—				219
Indirect installment			141,868				314				(163	)			142,019
Home equity			139,007				568				(234	)			139,341
Total consumer			321,231				1,011				(772	)			321,470
Total loans			1,377,472				3,832				1,082				1,382,386
Allowance for loan losses			(16,501	)			—				—				(16,501	)
Net loans		$	1,360,971			$	3,832			$	1,082			$	1,365,885

 

15

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company acquired loans in acquisitions and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

 

		March 31				March 31				March 31
		2015				2015				2015
		Heartland				Summit				Total
Commercial			15,378				59,398			$	74,776
Real estate			8,460				22,379				30,839
Consumer			6,954				7,749				14,703
Outstanding balance		$	30,792			$	89,526			$	120,318
Carrying amount, net of allowance of $254										$	120,064
		December 31 2014 Heartland				December 31 2014 Summit				December 31 2014 Total
Commercial		$	18,307			$	66,371			$	84,678
Real estate			9,734				24,653				34,387
Consumer			8,447				8,975				17,422
Outstanding balance		$	36,488			$	99,999			$	136,487
Carrying amount, net of allowance of $359										$	136,128

Accretable yield, or income expected to be collected for the three months ended March 31, is as follows:

 

		Three Months Ended March 31, 2015
		Heartland				Summit				Total
Balance at January 1		$	2,400			$	1,268			$	3,668
Additions			—				—				—
Accretion			(107	)			(99	)			(206	)
Reclassification from nonaccretable difference			—				—				—
Disposals			(88	)			(49	)			(137	)
Balance at December 31		$	2,205			$	1,120			$	3,325
		Three Months Ended March 31, 2014
		Heartland				Summit				Total
Balance at January 1		$	3,185			$	—			$	3,185
Additions			—				—				—
Accretion			(138	)			—				(138	)
Reclassification from nonaccretable difference			—				—				—
Disposals			(18	)			—				(18	)
Balance at December 31		$	3,029			$	—			$	3,029

During the three months ended March 31, 2015 and 2014, the Company decreased the allowance for loan losses by a recovery to the income statement of $105,000 and $0, respectively.

 

16

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6 – Allowance for Loan Losses

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

 

		Three Months Ended
		March 31
		2015				2014
		(Unaudited)				(Unaudited)
Balance at beginning of the period		$	16,501			$	15,992
Loans charged-off:
Commercial
Owner occupied real estate			—				—
Non owner occupied real estate			16				22
Residential development			—				—
Development & Spec Land Loans			—				7
Commercial and industrial			—				—
Total commercial			16				29
Real estate
Residential mortgage			22				22
Residential construction			—				—
Mortgage warehouse			—				—
Total real estate			22				22
Consumer
Direct Installment			59				33
Direct Installment Purchased			—				—
Indirect Installment			369				227
Home Equity			200				184
Total consumer			628				444
Total loans charged-off			666				495
Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate			8				4
Non owner occupied real estate			—				1
Residential development			—				—
Development & Spec Land Loans			—				—
Commercial and industrial			19				385
Total commercial			27				390
Real estate
Residential mortgage			2				4
Residential construction			—				—
Mortgage warehouse			—				—
Total real estate			2				4
Consumer
Direct Installment			29				18
Direct Installment Purchased			—				—
Indirect Installment			101				119
Home Equity			26				74
Total consumer			156				211
Total loan recoveries			185				605
Net loans charged-off (recovered)			481				(110	)
Provision charged to operating expense
Commercial			(45	)			212
Real estate			933				(604	)
Consumer			(274	)			392
Total provision charged to operating expense			614				—
Balance at the end of the period		$	16,634			$	16,102

 

17

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

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

 

March 31, 2015		Commercial				Real Estate				Mortgage Warehousing				Consumer				Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	1,029			$	—			$	—			$	—			$	1,029
Collectively evaluated for impairment			6,593				3,281				1,272				4,205				15,351
Loans acquired with deteriorated credit quality			254				—				—				—				254
Total ending allowance balance		$	7,876			$	3,281			$	1,272			$	4,205			$	16,634
Loans:
Individually evaluated for impairment		$	8,547			$	—			$	—			$	—			$	8,547
Collectively evaluated for impairment			687,092				261,155				179,379				327,328				1,454,954
Loans acquired with deteriorated credit quality			1,729				—				—				—				1,729
Total ending loans balance		$	697,368			$	261,155			$	179,379			$	327,328			$	1,465,230
December 31, 2014		Commercial				Real Estate				Mortgage Warehousing				Consumer				Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	1,589			$	—			$	—			$	—			$	1,589
Collectively evaluated for impairment			5,827				2,508				1,132				4,951				14,418
Loans acquired with deteriorated credit quality			494				—				—				—				494
Total ending allowance balance		$	7,910			$	2,508			$	1,132			$	4,951			$	16,501
Loans:
Individually evaluated for impairment		$	11,055			$	—			$	—			$	—			$	11,055
Collectively evaluated for impairment			664,251				255,383				129,636				321,470				1,370,740
Loans acquired with deteriorated credit quality			591				—				—				—				591
Total ending loans balance		$	675,897			$	255,383			$	129,636			$	321,470			$	1,382,386

 

18

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

March 31, 2015		Non-accrual				Loans Past Due Over 90 Days Still Accruing				Non- Performing TDRs				Performing TDRs				Total Non- Performing Loans
Commercial
Owner occupied real estate		$	1,452			$	—			$	—			$	41			$	1,493
Non owner occupied real estate			5,558				—				2,378				560				8,496
Residential development			—				—				—				—				—
Development & Spec Land Loans			—				—				—				—				—
Commercial and industrial			566				—				985				—				1,551
Total commercial			7,576				—				3,363				601				11,540
Real estate
Residential mortgage			2,547				—				748				2,506				5,801
Residential construction			—				—				261				—				261
Mortgage warehouse			—				—				—				—				—
Total real estate			2,547				—				1,009				2,506				6,062
Consumer
Direct Installment			334				—				—				—				334
Direct Installment Purchased			—				—				—				—				—
Indirect Installment			506				19				—				—				525
Home Equity			2,319				—				339				1,261				3,919
Total Consumer			3,159				19				339				1,261				4,778
Total		$	13,282			$	19			$	4,711			$	4,368			$	22,380
December 31, 2014		Non-accrual				Loans Past Due Over 90 Days Still Accruing				Non- Performing TDRs				Performing TDRs				Total Non- Performing Loans
Commercial
Owner occupied real estate		$	1,773			$	—			$	—			$	44			$	1,817
Non owner occupied real estate			7,439				—				217				566				8,222
Residential development			—				—				—				—				—
Development & Spec Land Loans			—				—				—				—				—
Commercial and industrial			812				—				1,004				—				1,816
Total commercial			10,024				—				1,221				610				11,855
Real estate
Residential mortgage			2,297				40				765				2,526				5,628
Residential construction			—				—				266				—				266
Mortgage warehouse			—				—				—				—				—
Total real estate			2,297				40				1,031				2,526				5,894
Consumer
Direct Installment			227				10				—				—				237
Direct Installment Purchased			—				—				—				—				—
Indirect Installment			557				47				—				—				604
Home Equity			2,207				18				391				1,236				3,852
Total Consumer			2,991				75				391				1,236				4,693
Total		$	15,312			$	115			$	2,643			$	4,372			$	22,442

 

19

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Included in the $13.3 million of non-accrual loans and the $4.7 million of non-performing TDRs at March 31, 2015 were $3.0 million and $417,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Credit Officer 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. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2015, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of March 31, 2015, the Company had $9.1 million in TDRs and $4.4 million were performing according to the restructured terms and one TDR was returned to accrual status during the first three months of 2015. There was $994,000 of specific reserves allocated to TDRs at March 31, 2015 based on the discounted cash flows.

 

20

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Loans transferred and classified as troubled debt restructuring during the three months ended March 31, 2015 and 2014, segregated by class, are shown in the table below.

 

		March 31, 2015								March 31, 2014
Commercial		Number of Defaults				Unpaid Principal Balance				Number of Defaults				Unpaid Principal Balance
Owner occupied real estate			1			$	2				—			$	—
Non owner occupied real estate			—				—				—				—
Residential development			—				—				—				—
Development & Spec Land Loans			—				—				—				—
Commercial and industrial			—				—				2				398
Total commercial			1				2				2				398
Real estate
Residential mortgage			—				—				—				—
Residential construction			—				—				—				—
Mortgage warehouse			—				—				—				—
Total real estate			—				—				—				—
Consumer
Direct Installment			—				—				—				—
Direct Installment Purchased			—				—				—				—
Indirect Installment			—				—				—				—
Home Equity			1				32				1				146
Total Consumer			1				32				1				146
			—				—
Total			2			$	34				3			$	544

Troubled debt restructured loans which had payment defaults during the three months ended March 31, 2015 and 2014, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or has been transferred to non-accrual.

 

		March 31, 2015								March 31, 2014
Commercial		Number of Defaults				Unpaid Principal Balance				Number of Defaults				Unpaid Principal Balance
Owner occupied real estate			1			$	2				—			$	—
Non owner occupied real estate			—				—				—				—
Residential development			—				—				—				—
Development & Spec Land Loans			—				—				—				—
Commercial and industrial			—				—				2				398
Total commercial			1				2				2				398
Real estate
Residential mortgage			—				—				1				154
Residential construction			—				—				—				—
Mortgage warehouse			—				—				—				—
Total real estate			—				—				1				154
Consumer
Direct Installment			—				—				—				—
Direct Installment Purchased			—				—				—				—
Indirect Installment			—				—				—				—
Home Equity			—				—				1				146
Total Consumer			—				—				1				146
			—				—
Total			1			$	2				4			$	698

 

21

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

														Three Months Ending
March 31, 2015		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Loss Allocated				Average Balance in Impaired Loans				Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate		$	1,076			$	1,077			$	—			$	1,329			$	2
Non owner occupied real estate			3,907				3,912				—				4,534				6
Residential development			—				—				—				—				—
Development & Spec Land Loans			—				—				—				—				—
Commercial and industrial			609				609				—				649				—
Total commercial			5,592				5,598				—				6,512				8
With an allowance recorded
Commercial
Owner occupied real estate			417				417				165				419				—
Non owner occupied real estate			1,590				1,590				184				1,590				—
Residential development			—				—				—				—				—
Development & Spec Land Loans			—				—				—				—				—
Commercial and industrial			942				942				680				949				—
Total commercial			2,949				2,949				1,029				2,958				—
Total		$	8,541			$	8,547			$	1,029			$	9,470			$	8

 

														Three Months Ending
March 31, 2014		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Loss Allocated				Average Balance in Impaired Loans				Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate		$	1,145			$	1,148			$	—			$	1,759			$	12
Non owner occupied real estate			3,443				3,446				—				3,514				5
Residential development			—				—				—				—				—
Development & Spec Land Loans			24				24				—				24				—
Commercial and industrial			333				349				—				608				—
Total commercial			4,945				4,967				—				5,905				17
With an allowance recorded
Commercial
Owner occupied real estate			—				—				—				(1	)			—
Non owner occupied real estate			347				347				170				353				—
Residential development			—				—				—				—				—
Development & Spec Land Loans			138				138				40				142				—
Commercial and industrial			1,883				1,883				1,080				1,727				2
Total commercial			2,368				2,368				1,290				2,221				2
Total		$	7,313			$	7,335			$	1,290			$	8,126			$	19

 

22

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

March 31, 2015		30 - 59 Days Past Due				60 - 89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Commercial
Owner occupied real estate		$	266			$	138			$	—			$	404			$	239,623			$	240,027
Non owner occupied real estate			—				84				—				84				308,336				308,420
Residential development			—				—				—				—				3,409				3,409
Development & Spec Land Loans			—				—				—				—				11,229				11,229
Commercial and industrial			320				—				—				320				131,102				131,422
Total commercial			586				222				—				808				693,699				694,507
Real estate
Residential mortgage			357				435				—				792				243,289				244,081
Residential construction			—				—				—				—				15,763				15,763
Mortgage warehouse			—				—				—				—				178,899				178,899
Total real estate			357				435				—				792				437,951				438,743
Consumer
Direct Installment			142				7				—				149				41,327				41,476
Direct Installment Purchased			—				—				—				—				195				195
Indirect Installment			559				80				19				658				146,280				146,938
Home Equity			1,038				519				—				1,557				136,901				138,458
Total consumer			1,739				606				19				2,364				324,703				327,067
Total		$	2,682			$	1,263			$	19			$	3,964			$	1,456,353			$	1,460,317
Percentage of total loans			0.18	%			0.09	%			0.00	%			0.27	%			99.73	%
December 31, 2014		30 - 59 Days Past Due				60 - 89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Commercial
Owner occupied real estate		$	103			$	645			$	—			$	748			$	227,632			$	228,380
Non owner occupied real estate			413				—				—				413				296,886				297,299
Residential development			—				—				—				—				2,027				2,027
Development & Spec Land Loans			—				—				—				—				12,097				12,097
Commercial and industrial			19				1				—				20				133,236				133,256
Total commercial			535				646				—				1,181				671,878				673,059
Real estate
Residential mortgage			1,033				193				40				1,266				241,255				242,521
Residential construction			—				—				—				—				11,505				11,505
Mortgage warehouse			—				—				—				—				129,156				129,156
Total real estate			1,033				193				40				1,266				381,916				383,182
Consumer
Direct Installment			113				4				10				127				40,010				40,137
Direct Installment Purchased			—				—				—				—				219				219
Indirect Installment			1,042				243				47				1,332				140,536				141,868
Home Equity			1,084				189				18				1,291				137,716				139,007
Total consumer			2,239				436				75				2,750				318,481				321,231
Total		$	3,807			$	1,275			$	115			$	5,197			$	1,372,275			$	1,377,472
Percentage of total loans			0.28	%			0.09	%			0.01	%			0.38	%			99.62	%

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

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

 

•

For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).

 

23

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

•

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

 

•

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

 

•

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

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

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

 

24

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

•

At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

 

•

At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

 

•

The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

 

•

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Risk Grade 4W Management Watch:

Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

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.

 

25

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

•

Unusual courses of action are needed to maintain a high probability of repayment.

 

•

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

 

•

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

 

•

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

 

•

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

•

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7: Doubtful

One or more of the following characteristics may be present in loans classified Doubtful:

 

•

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

 

•

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

•

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8: Loss

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

26

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

March 31, 2015		Pass				Special Mention				Substandard				Doubtful				Total
Commercial
Owner occupied real estate		$	227,083			$	7,728			$	5,216			$	—			$	240,027
Non owner occupied real estate			296,948				2,330				9,142				—				308,420
Residential development			3,409				—				—				—				3,409
Development & Spec Land Loans			11,153				76				—				—				11,229
Commercial and industrial			128,280				985				2,157				—				131,422
Total commercial			666,873				11,119				16,515				—				694,507
Real estate
Residential mortgage			238,280				—				5,801				—				244,081
Residential construction			15,502				—				261				—				15,763
Mortgage warehouse			178,899				—				—				—				178,899
Total real estate			432,681				—				6,062				—				438,743
Consumer
Direct Installment			41,142				—				334				—				41,476
Direct Installment Purchased			195				—				—				—				195
Indirect Installment			146,413				—				525				—				146,938
Home Equity			134,539				—				3,919				—				138,458
Total Consumer			322,289				—				4,778				—				327,067
Total		$	1,421,843			$	11,119			$	27,355			$	—			$	1,460,317
Percentage of total loans			97.37	%			0.76	%			1.87	%			0.00	%
December 31, 2014		Pass				Special Mention				Substandard				Doubtful				Total
Commercial
Owner occupied real estate		$	215,875			$	7,623			$	4,883			$	—			$	228,381
Non owner occupied real estate			283,518				4,458				9,323				—				297,299
Residential development			2,027				—				—				—				2,027
Development & Spec Land Loans			12,018				79				—				—				12,097
Commercial and industrial			128,589				1,799				2,868				—				133,256
Total commercial			642,027				13,959				17,074				—				673,060
Real estate
Residential mortgage			236,893				—				5,628				—				242,521
Residential construction			11,239				—				266				—				11,505
Mortgage warehouse			129,156				—				—				—				129,156
Total real estate			377,288				—				5,894				—				383,182
Consumer
Direct Installment			39,900				—				237				—				40,137
Direct Installment Purchased			219				—				—				—				219
Indirect Installment			141,264				—				604				—				141,868
Home Equity			135,155				—				3,852				—				139,007
Total Consumer			316,538				—				4,693				—				321,231
Total		$	1,335,854			$	13,959			$	27,661			$	—			$	1,377,473
Percentage of total loans			96.98	%			1.01	%			2.01	%			0.00	%

 

27

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 8 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at March 31, 2015 and December 31, 2014. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2015, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2015, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $106.6 million at March 31, 2015 and $102.7 million at December 31, 2014.

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, 2015, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.

 

28

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

		Asset Derivative						Liability Derivatives
		March 31, 2015						March 31, 2015
Derivatives designated as hedging instruments (Unaudited)		Balance Sheet Location		Fair Value				Balance Sheet Location				Fair Value
Interest rate contracts		Loans		$	—				Other liabilities			$	2,208
Interest rate contracts		Other Assets			2,208				Other liabilities				3,666
Total derivatives designated as hedging instruments					2,208								5,874
Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets			636				Other liabilities				—
Total derivatives not designated as hedging instruments					636								—
Total derivatives				$	2,844							$	5,874
		Asset Derivative						Liability Derivatives
		December 31, 2014						December 31, 2014
Derivatives designated as hedging instruments (Unaudited)		Balance Sheet Location		Fair Value				Balance Sheet Location				Fair Value
Interest rate contracts		Loans		$	—				Other liabilities			$	1,208
Interest rate contracts		Other Assets			1,208				Other liabilities				3,339
Total derivatives designated as hedging instruments					1,208								4,547
Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets			447				Other liabilities				—
Total derivatives not designated as hedging instruments					447								—
Total derivatives				$	1,655							$	4,547

The effect of the derivative instruments on the condensed consolidated statement of income for the three month periods ending is as follows:

 

		Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion)
		Three Months Ended March 31
Derivative in cash flow		2015				2014
hedging relationship		(Unaudited)				(Unaudited)
Interest rate contracts		$	(214	)		$	(146	)

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.

 

29

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

				Amount of Gain (Loss) Recognized on Derivative
				Three Months Ended March 31
Derivative in fair value		Location of gain (loss)		2015				2014
hedging relationship		recognized on derivative		(Unaudited)				(Unaudited)
Interest rate contracts		Interest income - loans		$	719			$	207
Interest rate contracts		Interest income - loans			(719	)			(207	)
Total				$	—			$	—
				Amount of Gain (Loss) Recognized on Derivative
				Three Months Ended March 31
Derivative not designated		Location of gain (loss)		2015				2014
as hedging relationship		recognized on derivative		(Unaudited)				(Unaudited)
Mortgage contracts		Other income - gain on sale of loans		$	189			$	240

Note 9 – Disclosures about Fair Value of Assets and Liabilities

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

 

Level 1		Quoted prices in active markets for identical assets or liabilities
Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a first 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.

 

30

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Hedged loans

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

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a first party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

 

						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2015
Available-for-sale securities
U.S. Treasury and federal agencies		$	28,421			$	—			$	28,421			$	—
State and municipal			51,576				—				51,576				—
Federal agency collateralized mortgage obligations			121,719				—				121,719				—
Federal agency mortgage-backed pools			129,267				—				129,267				—
Private labeled mortgage-backed pools			—				—				—				—
Corporate notes			50				—				50				—
Total available-for-sale securities			331,033				—				331,033				—
Hedged loans			104,383				—				104,383				—
Forward sale commitments			636				—				636				—
Interest rate swap agreements			(5,874	)			—				(5,874	)			—
Commitments to originate loans			—				—				—				—
December 31, 2014
Available-for-sale securities
U.S. Treasury and federal agencies		$	26,823			$	—			$	26,823			$	—
State and municipal			47,952				—				47,952				—
Federal agency collateralized mortgage obligations			122,860				—				122,860				—
Federal agency mortgage-backed pools			125,395				—				125,395				—
Private labeled mortgage-backed pools			689				—				689				—
Corporate notes			45				—				45				—
Total available-for-sale securities			323,764				—				323,764				—
Hedged loans			101,445				—				101,445				—
Forward sale commitments			447				—				447				—
Interest rate swap agreements			(4,546	)			—				(4,546	)			—
Commitments to originate loans			—				—				—				—

 

31

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

		Three Months Ended March 31
		2015				2014
		(Unaudited)				(Unaudited)
Non Interest Income
Total gains and losses from:
Hedged loans		$	719			$	207
Fair value interest rate swap agreements			(719	)			(207	)
Derivative loan commitments			189				240
		$	189			$	240

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):

 

						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2015
Impaired loans		$	7,512			$	—			$	—			$	7,512
Mortgage servicing rights			7,854				—				—				7,854
December 31, 2014
Impaired loans		$	9,464			$	—			$	—			$	9,464
Mortgage servicing rights			7,642				—				—				7,642

Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value decreased by $76,000 during the first three months of 2015 and increased by $5,000 during the first three months of 2014.

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

 

32

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Fair Value at

Valuation

Range (Weighted

March 31, 2015

Technique

Unobservable Inputs

Average)

Impaired loans

$

7,512

Collateral based measurement

Discount to reflect current market conditions and ultimate collectability

10% - 15% (12%)

Mortgage servicing rights

$

7,854

Discounted cashflows

Discount rate, Constant prepayment rate, Probability of default

10% - 15% (12%), 4% - 7% (4.6%), 1% - 10%  (4.5%)

Fair Value at

Valuation

Range (Weighted

December 31, 2014

Technique

Unobservable Inputs

Average)

Impaired loans

$

9,464

Collateral based measurement

Discount to reflect current market conditions and ultimate collectability

10% - 15% (12%)

Mortgage servicing rights

$

7,642

Discounted cashflows

Discount rate, Constant prepayment rate, Probability of default

10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%)

Note 10 – 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, 2015 and December 31, 2014. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

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

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

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

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

Net Loans - The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

 

33

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

FHLB and FRB Stock — Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.

Interest Receivable/Payable — The carrying amounts approximate fair value.

Deposits — The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.

Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.

Subordinated Debentures — Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

Commitments to Extend Credit and Standby Letters of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.

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

 

		March 31, 2015
						Quoted Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
Assets
Cash and due from banks		$	38,676			$	38,676			$	—			$	—
Investment securities, held to maturity			164,282				—				171,405				—
Loans held for sale			6,229				—				—				6,229
Loans excluding loan level hedges, net			1,340,342				—				—				1,379,815
Stock in FHLB and FRB			11,348				—				11,348				—
Interest receivable			8,431				—				8,431				—
Liabilities
Non-interest bearing deposits		$	285,181			$	285,181			$	—			$	—
Interest-bearing deposits			1,179,915				—				1,134,694				—
Borrowings			440,415				—				438,547				—
Subordinated debentures			32,680				—				32,674				—
Interest payable			504				—				504				—

 

34

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

		December 31, 2014
						Quoted Prices
						in Active
						Markets for				Significant Other				Significant
						Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
Assets
Cash and due from banks		$	43,476			$	43,476			$	—			$	—
Investment securities, held to maturity			165,767				—				169,904				—
Loans held for sale			6,143				—				—				6,143
Loans excluding loan level hedges, net			1,260,608				—				—				1,295,133
Stock in FHLB and FRB			11,348				—				11,348				—
Interest receivable			8,246				—				8,246				—
Liabilities
Non-interest bearing deposits		$	267,667			$	267,667			$	—			$	—
Interest-bearing deposits			1,214,652				—				1,158,912				—
Borrowings			351,198				—				348,597				—
Subordinated debentures			32,642				—				32,669				—
Interest payable			497				—				497				—

Note 11 – Accumulated Other Comprehensive Income

 

		March 31				December 31
		2015				2014
Unrealized gain on securities available for sale		$	5,856			$	4,018
Unamortized gain on securities held to maturity, previously transferred from AFS			1,544				1,658
Unrealized loss on derivative instruments			(3,666	)			(3,337	)
Tax effect			(1,307	)			(818	)
Total accumulated other comprehensive income		$	2,427			$	1,521

Note 12 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For March 31, 2015, Interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

 

35

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (March 31, 2015) and Tier I leverage ratios as set forth in the table below. As of March 31, 2015 and December 31, 2014, the Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the first quarter of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Horizon and the Bank’s actual and required capital ratios as of March 31, 2015 and December 31, 2014 were as follows:

 

										Required For Capital1								Well Capitalized Under Prompt1
		Actual								Adequacy Purposes								Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of March 31, 2015
Total capital1 (to risk-weighted assets)
Consolidated		$	218,613				13.74	%		$	127,286				8.00	%			N/A				N/A
Bank			195,409				12.35	%			126,581				8.00	%		$	158,226				10.00	%
Tier 1 capital1 (to risk-weighted assets)
Consolidated			201,979				12.69	%			95,498				6.00	%			N/A				N/A
Bank			178,775				11.30	%			94,925				6.00	%			126,566				8.00	%
Common equity tier 1 capital1 (to risk-weighted assets)
Consolidated			156,411				9.83	%			71,602				4.50	%			N/A				N/A
Bank			178,775				11.30	%			71,194				4.50	%			102,835				6.50	%
Tier 1 capital1 (to average assets)
Consolidated			201,979				9.97	%			81,035				4.00	%			N/A				N/A
Bank			178,775				8.77	%			81,539				4.00	%			101,924				5.00	%
As of December 31, 2014
Total capital1 (to risk-weighted assets)
Consolidated		$	212,276				14.48	%		$	117,280				8.00	%			N/A				N/A
Bank			192,604				13.08	%			117,801				8.00	%		$	147,251				10.00	%
Tier 1 capital1 (to risk-weighted assets)
Consolidated			195,775				13.35	%			58,659				4.00	%			N/A				N/A
Bank			176,103				11.96	%			58,897				4.00	%			88,346				6.00	%
Tier 1 capital1 (to average assets)
Consolidated			195,775				9.76	%			80,236				4.00	%			N/A				N/A
Bank			176,103				8.80	%			80,047				4.00	%			100,059				5.00	%

 

1	As defined by regulatory agencies

Note 13 – Business Combination

On February 18, 2015, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”). Pursuant to the Merger Agreement, Peoples would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Peoples Federal Savings Bank of DeKalb County, a federally chartered stock savings bank and wholly-owned subsidiary of Peoples, would merge with and into a wholly-owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

The boards of directors of each of Horizon and Peoples have approved the Merger and the Merger Agreement. Subject to the approval of the issuance of shares related to the Merger by Horizon shareholders, the Merger by Peoples shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger during the third quarter of 2015.

 

36

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

In connection with the Merger, each Peoples shareholder will receive 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each share of Peoples common stock owned by them. Based on Horizon’s February 18, 2015 closing price of $23.02 per share as reported on the NASDAQ Global Select Market, the implied transaction value is estimated at $73.1 million.

Subject to certain terms and conditions, the board of directors of Peoples has agreed to recommend the approval and adoption of the Merger Agreement to the Peoples shareholders and will solicit proxies voting in favor of the Merger from Peoples’ shareholders.

The Merger Agreement also provides for certain termination rights for both Horizon and Peoples, and further provides that upon termination of the Merger Agreement under certain circumstances, Peoples will be obligated to pay Horizon a termination fee.

As of December 31, 2014, Peoples reported total assets of approximately $486.6 million, total deposits of approximately $368.7 million and total loans of approximately $235.1 million.

Note 14 – Future Accounting Matters

The FASB has issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements.

The amendments add guidance to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in the FASB Accounting Standards Codification™ in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software.

For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.

The FASB has issued an Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810):

Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities.

In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ (Codification) and improves current GAAP by:

 

•

Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

 

37

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

•

Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE).

 

•

Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period.

 

 

38

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

 

•

economic conditions and their impact on Horizon and its customers;

 

•

changes in the level and volatility of interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;

 

•

rising interest rates and their impact on mortgage loan volumes;

 

•

estimates of fair value of certain of Horizon’s assets and liabilities;

 

•

volatility and disruption in financial markets;

 

•

prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

 

•

sources of liquidity;

 

•

potential risk of environmental liability related to lending activities;

 

•

changes in the competitive environment in Horizon’s market areas and among other financial service providers;

 

•

legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

 

•

the impact of the new Basel III capital rules;

 

•

changes in regulatory supervision and oversight, including monetary policy and capital requirements;

 

•

changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

 

•

rapid technological developments and changes;

 

•

the risks presented by cyber terrorism and data security breaches;

 

•

containing costs and expenses;

 

39

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

•

the slowing or failure of economic recovery;

 

•

the ability of the U.S. federal government to manage federal debt limits; and

 

•

the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by 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 2014 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 and Central Indiana and Southwestern and South Central Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

On November 12, 2013, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of SCB Bancorp, Inc., a Michigan corporation (“Summit”). Pursuant to the Merger Agreement, Summit would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Summit Community Bank, a Michigan-chartered commercial bank and wholly owned subsidiary of SCB Bancorp, Inc., would merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

On April 3, 2014, Horizon completed the acquisition of Summit and Horizon Bank’s acquisition of Summit Community Bank, through mergers effective April 3, 2014. Under the terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon common stock and $5.15 in cash for each outstanding share of Summit common stock. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon’s common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt).

Following are some highlights of Horizon’s financial performance through the first quarter of 2015:

 

•

Net income for the first quarter of 2015 increased 56.8% or $1.9 million compared to the same period in 2014 to $5.4 million or $.55 diluted earnings per share.

 

•

Total loans increased 24.3% on an annualized basis during the first quarter of 2015.

 

•

Excluding mortgage warehouse loans, total loans increased 10.7% on an annualized basis during the first quarter of 2015.

 

•

Commercial loans increased 12.9% on an annualized basis during the first quarter of 2015.

 

40

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

•

Net interest income for the first quarter of 2015 increased 27.2% or $3.6 million compared to the same period in 2014.

 

•

Non-interest income for the first quarter of 2015 increased 28.0% or $1.5 million compared to the same period in 2014.

 

•

Net interest margin, excluding the impact of acquisitions (“core net interest margin”), was 3.47% for the first quarter of 2015 compared to 3.38% for the same period in 2014.

 

•

Return on average assets was 1.05% for the first quarter of 2015.

 

•

Return on average common equity was 11.66% for the first quarter of 2015.

 

•

Horizon’s tangible book value per share rose to $16.80 at March 31, 2015, compared to $16.26 at December 31, 2014 and $15.52 at March 31, 2014. $16.80 is the highest tangible book value per share in the company’s history.

 

•

On February 19, 2015, Horizon announced a planned merger agreement with Peoples Bancorp and its wholly-owned subsidiary, Peoples Federal Savings Bank of DeKalb County, headquartered in Auburn, Indiana.

 

•

Horizon’s full-service Carmel, Indiana office opened on February 23, 2015.

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 2014 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. 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, 2015, Horizon had core deposit intangibles of $3.7 million subject to amortization and $28.2 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

 

41

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

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, 2015 was $23.39 per share compared to a book value of $20.25 per common share.

Horizon has concluded that, based on its own internal evaluation, the recorded value of goodwill is not impaired.

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the 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 first-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 first party to independently test the value of its servicing asset.

Derivative Instruments

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

 

42

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

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.

 

43

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Financial Condition

On March 31, 2015, Horizon’s total assets were $2.2 billion, an increase of approximately $77.0 million compared to December 31, 2014. The increase was primarily due to the growth in net loans of $82.7 million.

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

 

		March 31, 2015								December 31, 2014
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Available for sale
U.S. Treasury and federal agencies		$	28,400			$	28,421			$	26,996			$	26,823
State and municipal			50,036				51,576				46,535				47,952
Federal agency collateralized mortgage obligations			120,785				121,719				122,930				122,860
Federal agency mortgage-backed pools			125,923				129,267				122,583				125,395
Private labeled mortgage-backed pools			—				—				670				689
Corporate notes			32				50				32				45
Total available for sale investment securities		$	325,176			$	331,033			$	319,746			$	323,764
Held to maturity
U.S. Treasury and federal agencies		$	9,824			$	9,981			$	9,804			$	9,886
State and municipal			128,558				134,594				129,595				132,887
Federal agency collateralized mortgage obligations			3,873				3,918				4,039				4,073
Federal agency mortgage-backed pools			22,027				22,912				22,329				23,058
Total held to maturity investment securities		$	164,282			$	171,405			$	165,767			$	169,904

Total investment securities increased by approximately $5.8 million at March 31, 2015 compared to December 31, 2014 due to the reinvestment of investment security cash flows held at December 31, 2014 during the first quarter.

Total loans increased $82.8 million since December 31, 2014 to $1.5 billion as of March 31, 2015. This increase was the result of an increase in commercial loans of $21.4 million, mortgage warehouse loans of $49.7 million, residential mortgage loans of $5.8 million and consumer loans of $5.9 million. The growth in total loans during the three months ended March 31, 2015 is the direct result of increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion.

The following table presents the amount and growth rate of loans by product type for the three months ended March 31, 2015.

Loan Growth by Type

Three Months Ended March 31, 2015

(Dollars in Thousands)

 

																		Annualized
		March 31				December 31				Amount				Percent				Percent
		2015				2014				Change				Change				Change
		(Unaudited)
Commercial loans		$	695,736			$	674,314			$	21,422				3.2	%			12.9	%
Residential mortgage loans			260,390				254,625				5,765				2.3	%			9.2	%
Consumer loans			326,334				320,459				5,875				1.8	%			7.4	%
Held for sale loans			6,229				6,143				86				1.4	%			5.7	%
Subtotal			1,288,689				1,255,541				33,148				2.6	%			10.7	%
Mortgage warehouse loans			178,899				129,156				49,743				38.5	%			156.2	%
Total loans		$	1,467,588			$	1,384,697			$	82,891				6.0	%			24.3	%

 

44

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Total deposits decreased $17.2 million since December 31, 2014. This decrease was primarily the result of a decrease in municipal deposits and time deposits, partially offset by an increase in non-interest bearing deposits. The decrease in municipal deposits is seasonal and is impacted by the timing of property tax payment collection and disbursement. Non-interest bearing deposit accounts increased by $17.5 million, interest-bearing transaction accounts decreased by $25.4 million and time deposits decreased by $9.4 million during the three months ended March 31, 2015.

The Company’s borrowings increased $89.2 million from December 31, 2014 as total loan growth of $82.8 million outpaced the decrease in deposits of $17.2 million during the three months ended March 31, 2015, thereby increasing the Company’s reliance on borrowings to fund loan growth during the period. At March 31, 2015, the Company had $166.0 million in short-term funds borrowed compared to $95.0 million at December 31, 2014. The Company’s current balance sheet strategy is to utilize a reasonable level of short-term borrowings during extended low rate environments in addition to what is needed for the fluctuations in municipal deposits and mortgage warehouse lending.

Stockholders’ equity totaled $199.5 million at March 31, 2015 compared to $194.4 million at December 31, 2014. The increase in stockholders’ equity during the period was the result of the generation of net income and an increase in accumulated other comprehensive income, net of dividends declared. At March 31, 2015, the ratio of average stockholders’ equity to average assets was 9.56% compared to 9.56% for December 31, 2014. Book value per common share at March 31, 2015 increased to $20.25 compared to $19.75 at December 31, 2014.

Results of Operations

Overview

Consolidated net income for the three-month period ended March 31, 2015 was $5.4 million, an increase of 56.8% from the $3.4 million for the same period in 2014. Earnings per common share for the three months ended March 31, 2015 were $0.58 basic and $0.55 diluted, compared to $0.39 basic and $0.38 diluted for the same three-month period in 2014. Diluted earnings per share increased by $.17 compared to the same three-month period in 2014 due to an increase in interest income due to loan growth and an increase in accretion income from acquisition-related purchase accounting adjustments and an increase in non-interest income primarily due to an increase in gain in sale of loans and fiduciary activities, partially offset by an increase in non-interest expense primarily due to an increase in salaries and employee benefits from company growth and an increase in loan volume and an increase in the amount of shares outstanding as a result of the Summit acquisition.

Net Interest Income

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

Net interest income during the three months ended March 31, 2015 was $16.9 million, an increase of $3.6 million from the $13.3 million earned during the same period in 2014. Yields on the Company’s interest-earning assets increased by 10 basis points to 4.39% for the three months ending March 31, 2015 from 4.29% for the three months ended March 31, 2014. Interest income increased $3.6 million from $16.5 million for the three months ended March 31, 2014 to $20.1 million for the same period in 2014. This increase was due

 

45

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

to an increase in interest-earning assets offset by lower yields on loans and investment securities and an increase in interest income from acquisition-related purchase accounting adjustments from $389,000 for the first quarter of 2014 to $1.1 million for the same period of 2015.

Rates paid on interest-bearing liabilities decreased by 15 basis points for the three months ended March 31, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $12,000 compared to the three months ended March 31, 2014 to $3.2 million for the same period in 2015. This increase was due to higher balances of both interest-bearing deposits and borrowings. The net interest margin increased 22 basis points from 3.48% for the three months ended March 31, 2014 to 3.70% for the same period in 2015. The increase in the margin for the three months ended March 31, 2015 compared to the same period in 2014 was due to loan growth resulting in a higher ratio of loans to average earning assets, lower funding costs and an increase of $694,000 of interest income from acquisition-related purchase accounting adjustments, partially offset by a decrease in yield on loans and investment securities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.47% for the three-month period ending March 31, 2015 compared to 3.38% for the same period in 2014.

 

46

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

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

 

		Three Months Ended												Three Months Ended
		March 31, 2015												March 31, 2014
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
ASSETS
Interest-earning assets
Federal funds sold		$	4,804			$	2				0.17	%		$	7,439			$	4				0.22	%
Interest-earning deposits			10,772				3				0.11	%			5,722				3				0.21	%
Investment securities—taxable			360,554				2,149				2.42	%			386,793				2,383				2.50	%
Investment securities—non-taxable (1)			140,748				1,077				4.31	%			147,840				1,123				4.28	%
Loans receivable (2)(3)			1,382,992				16,862				4.96	%			1,050,491				12,954				5.00	%
Total interest-earning assets (1)			1,899,870				20,093				4.39	%			1,598,285				16,467				4.29	%
Non-interest-earning assets
Cash and due from banks			28,994												24,890
Allowance for loan losses			(16,489	)											(16,166	)
Other assets			157,553												138,322
		$	2,069,928											$	1,745,331
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits		$	1,215,862			$	1,232				0.41	%		$	1,079,514			$	1,277				0.48	%
Borrowings			337,430				1,479				1.78	%			228,138				1,422				2.53	%
Subordinated debentures			32,657				496				6.16	%			32,502				496				6.19	%
Total interest-bearing liabilities			1,585,949				3,207				0.82	%			1,340,154				3,195				0.97	%
Non-interest-bearing liabilities
Demand deposits			271,158												223,974
Accrued interest payable and other liabilities			14,989												12,807
Shareholders’ equity			197,832												168,396
		$	2,069,928											$	1,745,331
Net interest income/spread						$	16,886				3.57	%						$	13,272				3.32	%
Net interest income as a percent of average interest earning assets (1)											3.70	%											3.48	%

 

(1)	Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. Interest rate is presented on a tax equivalent basis.

(2)	Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.

(3)	Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

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 three-month period ended March 31, 2015, a provision of $614,000 was required to adequately fund the ALLL compared to no provision for the same period of 2014. Commercial loan net charge-offs during the three months ended March 31, 2015 were negative $11,000, residential mortgage loan net charge-offs were $20,000 and consumer loan net charge-offs were $472,000. The higher provision for loan losses in the first quarter of 2015 compared to the same period of 2014 was primarily due to continued loan growth. The ALLL balance at March 31, 2015 was $16.6 million or 1.13% of

 

47

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

total loans. This compares to an ALLL balance of $16.5 million at December 31, 2014 or 1.19% of total loans. The decrease in the ratio at March 31, 2015 compared to December 31, 2014 was due to an increase in total loans of $82.8 million and improving trends in classified and non-performing loans.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 1.22% as of March 31, 2015. The table below details Horizon’s loan loss reserve ratio composition as of March 31, 2015.

Allowance for Loan and Lease Loss Detail

As of March 31, 2015

(Dollars in Thousands, Unaudited)

 

		Horizon
		Legacy				Heartland				Summit				Total
Pre-discount loan balance		$	1,341,040			$	32,854			$	93,760			$	1,467,654
Allowance for loan losses (ALLL)			16,380				254				—				16,634
Loan discount			N/A				2,061				4,234				6,295
Total ALLL+loan discount			16,380				2,315				4,234				22,929
Loans, net		$	1,324,660			$	30,539			$	89,526			$	1,444,725
ALLL/ pre-discount loan balance			1.22	%			0.77	%			0.00	%			1.13	%
Loan discount/ pre-discount loan balance			N/A				6.27	%			4.52	%			0.43	%
Total ALLL+loan discount/ pre-discount loan balance			1.22	%			7.05	%			4.52	%			1.56	%

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, 2015.

Non-performing loans totaled $22.4 million on March 31, 2015 and December 31, 2014. Compared to December 31, 2014, non-performing real estate loans and consumer loans increased by $168,000 and $85,000, respectively, offset by a decrease of $315,000 in non-performing commercial loans.

At March 31, 2015, loans acquired represented $3.6 million in non-performing, $4.7 million in substandard and $242,000 in delinquent loans.

Other Real Estate Owned (OREO) totaled $749,000 on March 31, 2015, down from $1.2 million on December 31, 2014 and $1.7 million on March 31, 2014.

 

48

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Non-interest Income

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

 

		Three Months Ended
		March 31				March 31				Amount				Percent
		2015				2014				Change				Change
Non-interest Income
Service charges on deposit accounts		$	999			$	923			$	76				8.2	%
Wire transfer fees			151				112				39				34.8	%
Interchange fees			1,102				959				143				14.9	%
Fiduciary activities			1,297				1,048				249				23.8	%
Gain on sale of securities			124				—				124				100.0	%
Gain on sale of mortgage loans			2,379				1,411				968				68.6	%
Mortgage servicing net of impairment			179				207				(28	)			-13.5	%
Increase in cash surrender value of bank owned life insurance			258				233				25				10.7	%
Death benefit on officer life insurance			145				—				145				100.0	%
Other income			432				629				(197	)			-31.3	%
Total non-interest income		$	7,066			$	5,522			$	1,544				28.0	%

Total non-interest income was $1.5 million higher in the first quarter of 2015 compared to the same period of 2014. Interchange fees increased by $143,000, primarily due to an increase in volume. Fiduciary activity fees increased $249,000, primarily due to customer and market value growth. Gain on sale of securities increased $124,000 during the first quarter of 2015. This gain was the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. The sale of securities was also used to fund loan growth. Residential mortgage loan activity during the first quarter of 2015 generated $2.4 million of income from the gain on sale of mortgage loans, up $968,000 from the same period in 2014. The increase in the gain on sale of mortgage loans was due to an increase in total loans sold of $32.9 million from $36.0 million in the first quarter of 2014 to $68.9 million in the same period of 2015, partially offset by a decrease in the percentage earned on the sale of these loans. The Company also recognized a $145,000 death benefit on officer life insurance during the first quarter of 2015. Other income decreased by $197,000 compared to the previous year due to a nonrecurring gain recognized in the first quarter of 2014.

Non-interest Expense

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

 

		Three Months Ended
		March 31				March 31				Amount				Percent
		2015				2014				Change				Change
Non-interest expense
Salaries		$	5,633			$	5,356			$	277				5.2	%
Commission and bonuses			1,167				480				687				143.1	%
Employee benefits			1,704				1,647				57				3.5	%
Net occupancy expenses			1,551				1,424				127				8.9	%
Data processing			923				870				53				6.1	%
Professional fees			527				608				(81	)			-13.3	%
Outside services and consultants			626				661				(35	)			-5.3	%
Loan expense			1,257				1,015				242				23.8	%
FDIC deposit insurance			337				256				81				31.6	%
Other losses			(45	)			38				(83	)			-218.4	%
Other expense			2,388				2,159				229				10.6	%
Total non-interest expense		$	16,068			$	14,514			$	1,554				10.7	%

 

49

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Total non-interest expenses were $1.6 million higher in the first quarter of 2015 compared to the same period of 2014. Salaries increased $277,000 compared to the same period of 2014 primarily due to changes in annual merit pay and larger employee base. Commission and bonuses increased by $687,000 due to an increase in loan volume, larger employee base and first quarter performance in 2015. Net occupancy expenses increased $127,000 primarily due to market expansion. Loan expense increased $242,000 primarily due to an increase in loan origination volume. Other expenses increased $229,000 in the first quarter of 2015 compared to the same period in 2014 primarily due to the Company’s growth and expansion efforts. In addition, expenses were impacted in the first quarter of 2015 due to one-time transaction related costs of approximately $146,000.

Liquidity

The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including the FHLB. During the three months ended March 31, 2015, cash and cash equivalents decreased by approximately $4.8 million. At March 31, 2015, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $252.9 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $301.4 million at December 31, 2014 and $317.1 million at March 31, 2014.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2015. Stockholders’ equity totaled $199.5 million as of March 31, 2015, compared to $194.4 million as of December 31, 2014. For the three months ended March 31, 2015 and the year ended December 31, 2014, the ratio of average stockholders’ equity to average assets was 9.56%. The increase in stockholders’ equity during the period was the result of the generation of net income, an increase in accumulated other comprehensive income, net of dividends declared.

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, 2015, the dividend cost was approximately $31,000, or 1.0% annualized. Quarterly dividend payments for the year ending December 31, 2015 will be approximately $31,000, or 1.0% annualized. The Company plans to reserve cash so that it has the ability to redeem this preferred stock if and when the cost of this capital exceeds the cost of other forms of capital, subject to regulatory approval.

Horizon declared common stock dividends in the amount of $0.14 per share during the first three months of 2015 compared to $0.11 per share for the same period of 2014. The dividend payout ratio (dividends as a percent of basic earnings per share) was 24.2% and 28.0% for the first three months of 2015 and 2014, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2014.

Basel III

In July 2013, the federal banking agencies approved final rules to be phased in from 2015 to 2019 implementing the U.S. Basel Committee on Banking Supervision’s capital framework (“Basel III”) for all U.S. banks and for bank holding companies. Under these final rules, minimum requirements have increased for

 

50

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

both the quantity and quality of capital held by Horizon and the Bank. The rules include a new common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% (increased from 4.0%), a total capital ratio of 8 % (unchanged from prior rules) and a minimum leverage ratio of 4.0%. The final rules also require a Tier 1 capital conservation buffer above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. Institutions that do not maintain the required capital conservation buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of certain bonuses to senior executive management. The capital conservation buffer requirement will be phased in over three years beginning in 2016 at 0.625% of risk-weighted assets and ending at 2.5% of risk-weighted assets for 2019 and thereafter, effectively raising each minimum capital ratio by 2.5%.

The final rules also introduce other changes, including an increase in the capital required for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. Contrary to the proposed rule changes, the final rules allow banking organizations with less than $15 billion in assets as of December 31, 2010, to retain non-qualifying Tier 1 capital trust preferred securities issued prior to May 19, 2010, subject generally to a limit of 25% of Tier 1 capital.

These new minimum capital ratios became effective for Horizon on January 1, 2015, and will be fully phased-in on January 1, 2019. Horizon’s management believes that, as of March 31, 2015, Horizon and the Bank would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis, as if such requirements were currently in effect.

Use of Non-GAAP Financial Measures

Certain information set forth in this quarterly report on Form 10-Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non-GAAP financial measures of the net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to be non-recurring. Horizon believes that these non-GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and one-time costs of acquisitions and non-core items, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.

 

51

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Non-GAAP Reconciliation of Net Interest Margin

(Dollar Amounts in Thousands)

 

		Three Months Ended
		March 31				December 31				March 31
		2015				2014				2014
		(Unaudited)								(Unaudited)
Net Interest Margin As Reported
Net interest income		$	16,886			$	16,523			$	13,272
Average interest-earning assets			1,899,870				1,865,750				1,598,285
Net interest income as a percent of average interest-earning assets			3.70	%			3.64	%			3.48	%
Impact of Acquisitions
Interest income from acquisition-related purchase accounting adjustments		$	(1,083	)		$	(719	)		$	(389	)
Net Interest Margin Excluding Impact of Acquisitions
Net interest income		$	15,803			$	15,804			$	12,883
Average interest-earning assets			1,899,870				1,865,750				1,598,285
Net interest income as a percent of average interest-earning assets			3.47	%			3.49	%			3.38	%

 

52

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three Months Ended March 31, 2015

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2014 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 2014 Annual Report on Form 10-K.

 

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Based on an evaluation of disclosure controls and procedures as of March 31, 2015, 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, 2015, 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.

 

53

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three Months Ended March 31, 2015

 

 

ITEM 1.

LEGAL PROCEEDINGS

Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

 

ITEM 1A.

RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10-K for 2014.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5.

OTHER INFORMATION

Not Applicable

 

54

---

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three Months Ended March 31, 2015

 

ITEM 6.

EXHIBITS

(a) Exhibits

 

Exhibit No.		Description
31.1		Certification of Craig M. Dwight
31.2		Certification of Mark E. Secor
32		Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.1*		Form of 2013 Omnibus Equity Incentive Plan Performance Share Award Agreement (with restrictions)
10.2*		Form of 2013 Omnibus Equity Incentive Plan Performance Share Award Agreement (without restrictions)
10.3*		Form of 2013 Omnibus Equity Incentive Plan Stock Option Agreement (with restrictions)
10.4*		Form of 2013 Omnibus Equity Incentive Plan Stock Option Agreement (without restrictions)
101		Interactive Data Files

 

*	Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements.

 

55

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

						HORIZON BANCORP
Dated: May 4, 2015						/s/ Craig M. Dwight
						Craig M. Dwight
						Chief Executive Officer
Dated: May 4, 2015						/s/ Mark E. Secor
						Mark E. Secor
						Chief Financial Officer

 

56

---

Table of Contents

INDEX TO EXHIBITS

 

Exhibit No.		Description		Location
Exhibit 31.1		Certification of Craig M. Dwight			Attached
Exhibit 31.2		Certification of Mark E. Secor			Attached
Exhibit 32		Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002			Attached
Exhibit 10.1*		Form of 2013 Omnibus Equity Incentive Plan Performance Share Award Agreement (with restrictions)			Attached
Exhibit 10.2*		Form of 2013 Omnibus Equity Incentive Plan Performance Share Award Agreement (without restrictions)			Attached
Exhibit 10.3*		Form of 2013 Omnibus Equity Incentive Plan Stock Option Agreement (with restrictions)			Attached
Exhibit 10.4*		Form of 2013 Omnibus Equity Incentive Plan Stock Option Agreement (without restrictions)			Attached
Exhibit 101		Interactive Data Files			Attached

 

*	Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements.

 

57

Exhibit 10.1

HORIZON BANCORP

2013 OMNIBUS EQUITY INCENTIVE PLAN

PERFORMANCE SHARE AWARD AGREEMENT

THIS AGREEMENT (the “Agreement”), made and executed as of the      day of                 , 201  , between Horizon Bancorp, an Indiana corporation (the “Company”), and             , an officer or employee of the Company or one of its Affiliates, including but not limited to Horizon Bank, N.A., (the “Participant”).

WITNESSETH:

WHEREAS, the Company has adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (the “Plan”) to further the growth and financial success of the Company and its Affiliates by aligning the interests of Participants, through the ownership of Shares and through other incentives, with the interests of the Company’s shareholders; to provide Participants with an incentive for excellence in individual performance; to promote teamwork among Participants; to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company’s success; and to allow Participants to share in the success of the Company; and

WHEREAS, it is the view of the Company that this goal can be achieved by granting Performance Shares to eligible employees; and

WHEREAS, the Participant has been designated by the Committee as an individual to whom Performance Shares should be granted as determined from the duties performed, the initiative and industry of the Participant, and his or her potential contribution to the future development, growth and prosperity of the Company;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Participant agree as follows:

1.    Award of Performance Shares. The Company hereby awards to the Participant, effective as of the date the Committee formally approves the award by resolution,              (            ) Performance Shares, subject to the terms and conditions of this Agreement and the provisions of the Plan. All provisions of the Plan, including defined terms, are incorporated herein and expressly made a part of this Agreement by reference. The Participant hereby acknowledges that he or she has received a copy of the Plan.

2.    Performance Periods. The Performance Period to which the award of Performance Shares relates is the three-year period beginning on              201   and ending on              201  .

3.    Performance Goals. The Performance Goals for the Performance Period are specified in Schedule A based on a comparison of the Company’s average performance over the Performance Period (i.e., the summation of performance for calendar years one, two and three divided by three) for (a) return on common equity (“ROCE”), (b) compounded annual growth rate of total assets (“CAGR”), and (c) return on average assets (“ROAA”) relative to the average

 

1

---

performance for publicly-traded banks with total assets between $1 billion and $5 billion on the SNL Bank Index (the “SNL Index”) for ROCE, CAGR and ROAA over the Performance Period. Only banks which have reported year-end results by March 1^st will be considered for comparison purposes. In the event SNL Financial LC ceases to publish the SNL Index, the Committee will engage an independent compensation consultant to assist the Committee in selecting a new bank index or bank peer group for purposes of determining if a Performance Goal has been met.

4.    Earning and Vesting of Performance Shares. The Performance Shares will become earned and vested for the Performance Period to the extent (a) the Performance Goals are satisfied in accordance with the earnings provision of Schedule A, and (b) the Participant is actively employed on the last day of the Performance Period (unless, during the Performance Period, he terminates employment due to death, Permanent and Total Disability, Retirement or there is a Change in Control). If the Performance Goals are not satisfied, those Performance Shares eligible to be earned and vested during such Performance Period will be forfeited effective as of the last day of the Performance Period.

5.    Termination of Service. Except as otherwise provided in Section 6 below in the case of a Change in Control, all unvested Performance Shares will be forfeited effective as of the date of the Participant’s Termination of Service; provided, however, if the Participant incurs a Termination of Service due to death, Permanent and Total Disability or Retirement, the Performance Shares for such Performance Period will be treated as earned and vested to the extent the Performance Goals for such Performance Periods are satisfied, as contemplated under Schedule A, effective as of the last day of such Performance Period, in a pro rata manner based on the number of days in the Performance Period in which the Participant was an employee prior to Termination of Service.

6.    Change in Control. Notwithstanding any other provision of this Agreement, the Performance Shares shall be vested upon a Change in Control of the Company as provided in Section 11.1 of the Plan.

7.    Form and Timing of Payment of Performance Shares. Payment of earned and vested Performance Shares will be made as soon as practicable in the calendar year after the end of the applicable Performance Period. The Committee, in its sole discretion, may pay earned and vested Performance Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned and vested Performance Shares, determined as of the last day of the Performance Period) or a combination thereof.

8.    Pass-Through of Dividends. Unless otherwise determined by the Committee in its sole discretion, the Participant shall be entitled to receive all cash dividends which would have been paid with respect to the Performance Shares if they had been actual Shares, regardless of whether the Period of Restriction has lapsed.

9.    Participant’s Representations. The Participant represents to the Company that:

(a)    The terms and arrangements relating to the grant of Performance Shares and the offer thereof have been arrived at or made through direct communication with the Company or a person acting in its behalf and the Participant;

 

2

---

(b)    The Participant has received a balance sheet and income statement of the Company and as an employee of the Company or one of its Affiliates:

(i)    is thoroughly familiar with the Company’s business affairs and financial condition; and

(ii)    has been provided with or has access to such information (and has such knowledge and experience in financial and business matters that the Participant is capable of utilizing such information) as is necessary to evaluate the risks, and make an informed investment decision with respect to, the grant of Performance Shares.

10.    Nontransferability. Performance Shares cannot be (a) sold, transferred, assigned, margined, encumbered, bequeathed, gifted, alienated, hypothecated, pledged or otherwise disposed of, whether by operation of law, whether voluntarily or involuntarily or otherwise, or (b) subject to execution, attachment or similar process. Any attempted or purported transfer of Performance Shares in contravention of this Section or the Plan shall be null and void and of no force or effect whatsoever.

11.    Issuance of Shares. Within a reasonable period of time following the end of the Period of Restriction, the Company shall issue to the Participant or his beneficiary the number of Performance Shares specified in Section 1 of this Agreement, less any withholding required by Section 13 of this Agreement.

12.    Restrictive Legend. In the event the Participant is an “affiliate” of the Company (as defined by Rule 144 promulgated under the Securities Act of 1933, as amended), the Company may require that the shares to be issued to such Participant contain a legend in substantially the following form:

“THE HOLDER OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS AN “AFFILIATE” OF THE COMPANY (AS DEFINED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED), AND THEREFORE, THE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS.”

The Company shall issue such additional certificates as may be required to give effect to Section 14 of this Agreement.

Notwithstanding the foregoing provisions of this Section, the Company shall not be required to deliver any certificates for shares prior to: (a) the end of the Period of Restriction; (b) completing any registration or other qualification of the Shares, which the Company deems necessary or advisable under any federal or state law or under the rulings or regulations of the

 

3

---

Securities and Exchange Commission or any other governmental regulatory body; and (c) obtaining any approval or other clearance from any federal or state governmental agency or body, which the Company determines to be necessary or advisable. The Company has no obligation to obtain the fulfillment of the conditions specified in the preceding sentence. As a further condition to the issuance of certificates for shares, the Company may require the making of any representation or warranty which the Company deems necessary or advisable under any applicable law or regulation.

13.    Income and Employment Tax Withholding. The Participant shall be solely responsible for paying to the Company all required federal, state, city and local income and employment taxes which arise on the vesting of the Performance Shares. The Committee, in its sole discretion and subject to such rules as it may adopt, shall require the Participant to satisfy any withholding tax obligation by having the Company retain Performance Shares which have a Fair Market Value, determined as of the date of payment for such Performance Shares to the Participant, equal to the amount of the minimum withholding tax to be satisfied by that retention.

14.    Mitigation of Excise Tax. The Participant acknowledges that the Performance Shares issued hereunder is subject to reduction by the Committee for the reasons specified in Section 13.9 of the Plan.

15.    Indemnity. The Participant hereby agrees to indemnify and hold harmless the Company and its Affiliates (and their respective directors, officers and employees), and the Committee, from and against any and all losses, claims, damages, liabilities and expenses based upon or arising out of the incorrectness or alleged incorrectness of any representation made by Participant to the Company or any failure on the part of the Participant to perform any agreements contained herein. The Participant hereby further agrees to release and hold harmless the Company and its Affiliates (and their respective directors, officers and employees) from and against any tax liability, including without limitation, interest and penalties, incurred by the Participant in connection with the Participant’s participation in the Plan.

16.    Financial Information. The Participant understands he or she is able to access the Company’s most recent quarterly balance sheet and quarterly income statement by visiting the following internet address: http://www.snl.com/Irweblinkx/finl.aspx?iid=100750.

17.    Changes in Shares. In the event of any change in the Shares, as described in Section 3.6 of the Plan, the Committee shall make appropriate adjustment or substitution in the number of Performance Shares, all as provided in the Plan. The Committee’s determination in this respect shall be final and binding upon all parties.

18.    Non-Disclosure; Return of Confidential Information and Other Property.

(a)    Access to Confidential Information. The Participant understands, acknowledges and agrees that during the course of his employment with the Company he has gained or shall gain information regarding, knowledge of and familiarity with the Confidential Information (as defined in subsection 18(c)) of the Company and any Affiliates and that if the Confidential Information was disclosed by the Participant, the Company or Affiliate would suffer irreparable damage and harm. The Participant

 

4

---

understands, acknowledges and agrees that the Confidential Information derives substantial economic value from, among other reasons, not being known or readily ascertainable by proper means by others who could obtain economic value therefrom upon disclosure. The Participant acknowledges and agrees that the Company and all Affiliates use reasonable means to maintain the secrecy and confidentiality of the Confidential Information.

(b)    Non-Disclosure. At all times while the Participant is employed by the Company or any Affiliate, and at all times thereafter, the Participant shall not (i) directly or indirectly disclose, provide or discuss any Confidential Information with or to any Person (as defined in subsection 18(d) other than those directors, officers, employees, representatives and agents of the Company and any Affiliates who need to know such Confidential Information for a proper corporate purpose, and (ii) directly or indirectly use any Confidential Information (A) to compete against the Company or any Affiliates, or (B) for the Participant’s own benefit or for the benefit of any Person other than the Company or any Affiliate.

(c)    Confidential Information Defined. For purposes of this Agreement, the term “Confidential Information” means any and all:

(i)    materials, records, data, documents, lists, writings and information (whether in writing, printed, verbal, electronic, computerized, on disk or otherwise) (A) relating or referring in any manner to the business, operations, affairs, financial condition, results of operation, cash flow, assets, liabilities, sales, revenues, income, estimates, projections, policies, strategies, techniques, methods, products, developments, suppliers, relationships and/or customers of the Company or any Affiliate that are confidential, proprietary or not otherwise publicly available, in any event not without a breach of this Agreement, or (B) that the Company or any Affiliate has deemed confidential, proprietary or nonpublic;

(ii)    trade secrets of the Company or any Affiliate, as defined in Indiana Code Section 24-2-3-2, as amended, or any successor statute; and

(iii)    any and all copies, summaries, analyses and extracts which relate or refer to or reflect any of the items set forth in (i) or (ii) above. The Participant agrees that all Confidential Information is confidential and is and at all times shall remain the property of, as applicable, the Company or any of the Affiliates.

(d)    Definition of Person. For purposes of this Agreement, the term “Person” shall mean any natural person, proprietorship, partnership, corporation, limited liability corporation, bank, organization, firm, business, joint venture, association, trust or other entity and any government agency, body or authority.

(e)    Return of Confidential Information and Other Property. The Participant covenants and agrees:

 

5

---

(i)    to keep all Confidential Information subject to the Company’s or any Affiliate’s custody and control and to promptly return to the Company or the appropriate Affiliate all Confidential Information that is still in the Participant’s possession or control at the termination of the Participant’s employment with the Company; and

(ii)    promptly upon termination of the Participant’s employment with the Company, to return to the Company, at the Company’s principal office, all vehicles, equipment, computers, credit cards and other property of the Company and to cease using any of the foregoing.

19.    Non-Solicitation of Employees and Other Representatives. During the term of Participant’s employment with Horizon Bank, N.A. (the “Bank”) and for twelve (12) months thereafter, (a) Participant will not directly or indirectly encourage, solicit, induce, or attempt to encourage, solicit, or induce any employee, agent, contractor, or representative of the Bank to terminate his/her employment or contractual relationship with the Bank (or devote less than full time and efforts to the Bank’s business), and (b) Participant will not directly or indirectly hire or attempt to hire: (i) for any competitive position with any competitor any person who is an employee, agent, contactor, or representative to the Bank at such time (or who has been an employee, agent, contractor, or representative of the Bank at any time within the preceding 180 days) or (ii) for any position with any business any person who is an employee, agent, contractor, or representative of the Bank at such time (or who has been an employee, agent, contractor, or representative of the Bank at any time within the preceding 180 days).

20.    Non-Solicitation of Customers. During the term of Participant’s employment with the Bank and for twelve (12) months thereafter, Participant will not, in a competitive capacity, on behalf of any person or entity other than the Bank, directly or indirectly:

(a)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any customer of the Bank with whom the Participant had contact (either directly or indirectly) or over which Participant had responsibility at any time in the one (1) year preceding Participant’s separation;

(b)    solicit, divert (or attempt to solicit or divert) or accept any competitive business from any customer of the Bank about whom Participant has obtained Confidential Information while employed by the Bank;

(c)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any identified prospective customer of the Bank with whom Participant had contact (either directly or indirectly) or over which Participant had responsibility at any time in the one (1) year preceding Participant’s separation; or

(d)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any identified prospective customer of the Bank about whom Participant has obtained Confidential Information.

 

6

---

21.    Limited Covenant Not to Compete.

(a)    During Participant’s employment by the Bank, Participant shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, act as an agent or consultant for, or have any business connection, or business or employment relationship, with any entity or person which competes with the Bank.

(b)    Moreover, for a period of              months after Participant’s separation from the Bank for any reason, Participant shall not:

(i)    Within the Indiana counties of              and the Michigan counties of             ;

(ii)    Within forty (40) miles of any Bank branch in, or for which Participant performed services or has been assigned responsibility, at any time within one (1) year preceding Participant’s separation; or

(iii)    in the Indiana and/or Michigan cities or towns for which Participant has been assigned responsibility, in writing, at any time within one (1) year preceding Participant’s separation;

directly or indirectly and in a competitive capacity own, manage, finance, operate, control, or participate in ownership, management, or operation of, act as an agent, consultant, or be employed with, any business engaged in the marketing, sale, or servicing of any service or product:

(1)    with which Participant was involved during Participant’s last year of employment with the Bank; or

(2)    which the Bank is developing, marketing, selling, or servicing (or plans to develop, market, sell, or service) and about which Participant gained any Confidential Information in the course of Participant’s employment with the Bank.

(c)    For purposes of this Agreement, the term “competitive capacity” shall mean (i) performing tasks or duties similar to those Participant performed in Participant’s last year of employment at the Bank for a competitor of the Bank; (ii) managing/supervising those who, for a competitor of the Bank, perform tasks or duties similar to those which Participant performed in Participant’s last year of employment with the Bank; or (iii) performing, on behalf of a competitor of the Bank, tasks or duties in which Participant utilizes any Confidential Information that Participant learned in the course of Participant’s employment with the Bank.

22.    Periods of Noncompliance and Reasonableness of Periods. The restrictions and covenants contained in Sections 19, 20, and 21 shall be deemed not to run during all periods of noncompliance, the intention of the parties hereto being to have such restrictions and covenants apply during the Term of this Agreement and for the full periods specified in Sections 19, 20 and 21. The Company and the Participant understand, acknowledge and agree that the restrictions

 

7

---

and covenants contained in Sections 18, 19, 20 and 21 are reasonable in view of the nature of the business in which the Company and the Affiliates are engaged, the Participant’s positions with the Company and/or the Bank and the Participant’s advantageous knowledge of and familiarity with the business, operations, affairs and customers of the Company and the Affiliates, including but not limited to the Bank.

The Company’s obligation to pay the amounts otherwise payable to the Participant pursuant to this Agreement shall immediately terminate in the event that the Participant breaches any of the provisions of Sections 18, 19, 20 or 21. Notwithstanding the foregoing:

(a)    the covenants of the Participant set forth in Sections 18, 19, 20 or 21 shall continue in full force and effect and be binding upon the Participant;

(b)    the Company shall be entitled to the remedies specified in Section 24; and

(c)    the Company shall be entitled to its damages, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) resulting from or relating to the Participant’s breach of any of the provisions of Sections 18, 19, 20 or 21.

23.    Survival of Certain Provisions. Upon any termination of the Participant’s employment with the Bank, the Participant and the Company hereby expressly agree that the provisions of Sections 18, 19, 20, 21, 22, 23 and 24 shall continue to be in full force and effect and binding upon the Participant and the Company in accordance with the applicable respective provisions of such Sections.

24.    Remedies. The Participant agrees that the Company or the Bank shall suffer irreparable damage and injury and shall not have an adequate remedy at law in the event of any actual, threatened or attempted breach by the Participant of any provision of Sections 18, 19, 20 or 21. Accordingly, in the event of a breach or a threatened or attempted breach by the Participant of any provision of Sections 18, 19, 20 or 21, in addition to all other remedies to which the Company and the Bank are entitled at law, in equity or otherwise, the Company and the Bank may be entitled to a temporary restraining order and a permanent injunction or a decree of specific performance of any provision of Sections 18, 19, 20 or 21. The foregoing remedies shall not be deemed to be the exclusive rights or remedies of the Company or the Bank for any breach of or noncompliance with this Agreement by the Participant but shall be in addition to all other rights and remedies available to the Company or the Bank at law, in equity or otherwise.

25.    Severability. In case any one or more of the provisions (or any portion thereof) contained herein will, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions (or portion thereof) had never been contained herein. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be unenforceable because of the provision’s scope, duration or other factor, then such provision shall be considered divisible and the court making such determination shall have the power to reduce or limit (but not increase or make greater) such scope, duration or other factor or to reform (but not increase or make greater) such provision to make it enforceable to the maximum extent permitted

 

8

---

by law, and such provision shall then be enforceable against the appropriate party hereto in its reformed, reduced or limited form; provided, however, that a provision shall be enforceable in its reformed, reduced or limited form only in the particular jurisdiction in which a court of competent jurisdiction makes such determination.

26.    Effect of Headings. The descriptive headings of the Sections and, where applicable, subsections, of this Agreement are inserted for convenience and identification only and do not constitute a part of this Agreement for purposes of interpretation.

27.    Controlling Laws. Except to the extent superseded by the laws of the United States, the laws of the State of Indiana, without reference to the choice of law principles thereof, shall be controlling in all matters relating to this Agreement.

28.    Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which collectively shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Company, by its officer thereunder duly authorized, and the Participant, have caused this Performance Share Award Agreement to be executed as of the day and year first above written.

 

HORIZON BANCORP						PARTICIPANT
By:

 

ATTEST
By:

 

9

---

SCHEDULE A

PERFORMANCE GOALS AND EARNINGS LEVELS FOR PERFORMANCE PERIOD

 

Performance Goal		Weight		Threshold 50% Payout		Target 100% Payout		Maximum 125% Payout
Return on Common Equity: The ROCE of the Company compared with the ROCE of the banks included in the SNL Bank Index.		34%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile
Compounded Annual Growth Rate of Total Assets: The CAGR of total assets for the Company compared with the CAGR of total assets for the banks included SNL Bank Index.		33%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile
Return on Average Assets: The ROAA for the Company compared with the ROAA for the banks included in the SNL Bank Index.		33%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile

 

10

Exhibit 10.2

HORIZON BANCORP

2013 OMNIBUS EQUITY INCENTIVE PLAN

PERFORMANCE SHARE AWARD AGREEMENT

THIS AGREEMENT (the “Agreement”), made and executed as of the      day of             , 201  , between Horizon Bancorp, an Indiana corporation (the “Company”), and             , an officer or employee of the Company or one of its Affiliates, including but not limited to Horizon Bank, N.A. (the “Participant”).

WITNESSETH:

WHEREAS, the Company has adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (the “Plan”) to further the growth and financial success of the Company and its Affiliates by aligning the interests of Participants, through the ownership of Shares and through other incentives, with the interests of the Company’s shareholders; to provide Participants with an incentive for excellence in individual performance; to promote teamwork among Participants; to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company’s success; and to allow Participants to share in the success of the Company; and

WHEREAS, it is the view of the Company that this goal can be achieved by granting Performance Shares to eligible employees; and

WHEREAS, the Participant has been designated by the Committee as an individual to whom Performance Shares should be granted as determined from the duties performed, the initiative and industry of the Participant, and his or her potential contribution to the future development, growth and prosperity of the Company;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Participant agree as follows:

1.    Award of Performance Shares. The Company hereby awards to the Participant, effective as of the date the Committee formally approves the award by resolution,              (            ) Performance Shares, subject to the terms and conditions of this Agreement and the provisions of the Plan. All provisions of the Plan, including defined terms, are incorporated herein and expressly made a part of this Agreement by reference. The Participant hereby acknowledges that he or she has received a copy of the Plan.

2.    Performance Periods. The Performance Period to which the award of Performance Shares relates is the three-year period beginning on             , 201_ and ending on             , 201  .

3.    Performance Goals. The Performance Goals for the Performance Period are specified in Schedule A based on a comparison of the Company’s average performance over the Performance Period (i.e., the summation of performance for calendar years one, two and three divided by three) for (a) return on common equity (“ROCE”), (b) compounded annual growth rate of total assets (“CAGR”), and (c) return on average assets (“ROAA”) relative to the average

 

1

---

performance for publicly-traded banks with total assets between $1 billion and $5 billion on the SNL Bank Index (the “SNL Index”) for ROCE, CAGR and ROAA over the Performance Period. Only banks which have reported year-end results by March 1st will be considered for comparison purposes. In the event SNL Financial LC ceases to publish the SNL Index, the Committee will engage an independent compensation consultant to assist the Committee in selecting a new bank index or bank peer group for purposes of determining if a Performance Goal has been met.

4.    Earning and Vesting of Performance Shares. The Performance Shares will become earned and vested for the Performance Period to the extent (a) the Performance Goals are satisfied in accordance with the earnings provision of Schedule A, and (b) the Participant is actively employed on the last day of the Performance Period (unless, during the Performance Period, he terminates employment due to death, Permanent and Total Disability, Retirement or there is a Change in Control). If the Performance Goals are not satisfied, those Performance Shares eligible to be earned and vested during such Performance Period will be forfeited effective as of the last day of the Performance Period.

5.    Termination of Service. Except as otherwise provided in Section 6 below in the case of a Change in Control, all unvested Performance Shares will be forfeited effective as of the date of the Participant’s Termination of Service; provided, however, if the Participant incurs a Termination of Service due to death, Permanent and Total Disability or Retirement, the Performance Shares for such Performance Period will be treated as earned and vested to the extent the Performance Goals for such Performance Periods are satisfied, as contemplated under Schedule A, effective as of the last day of such Performance Period, in a pro rata manner based on the number of days in the Performance Period in which the Participant was an employee prior to Termination of Service.

6.    Change in Control. Notwithstanding any other provision of this Agreement, the Performance Shares shall be vested upon a Change in Control of the Company as provided in Section 11.1 of the Plan.

7.    Form and Timing of Payment of Performance Shares. Payment of earned and vested Performance Shares will be made as soon as practicable in the calendar year after the end of the applicable Performance Period. The Committee, in its sole discretion, may pay earned and vested Performance Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned and vested Performance Shares, determined as of the last day of the Performance Period) or a combination thereof.

8.    Pass-Through of Dividends. Unless otherwise determined by the Committee in its sole discretion, the Participant shall be entitled to receive all cash dividends which would have been paid with respect to the Performance Shares if they had been actual Shares, regardless of whether the Period of Restriction has lapsed.

 

2

---

9.    Participant’s Representations. The Participant represents to the Company that:

 

(a)

The terms and arrangements relating to the grant of Performance Shares and the offer thereof have been arrived at or made through direct communication with the Company or a person acting in its behalf and the Participant;

 

(b)

The Participant has received a balance sheet and income statement of the Company and as an employee of the Company or one of its Affiliates:

 

(i)

is thoroughly familiar with the Company’s business affairs and financial condition; and

 

(ii)

has been provided with or has access to such information (and has such knowledge and experience in financial and business matters that the Participant is capable of utilizing such information) as is necessary to evaluate the risks, and make an informed investment decision with respect to, the grant of Performance Shares.

10.    Nontransferability. Performance Shares cannot be (a) sold, transferred, assigned, margined, encumbered, bequeathed, gifted, alienated, hypothecated, pledged or otherwise disposed of, whether by operation of law, whether voluntarily or involuntarily or otherwise, or (b) subject to execution, attachment or similar process. Any attempted or purported transfer of Performance Shares in contravention of this Section or the Plan shall be null and void and of no force or effect whatsoever.

11.    Issuance of Shares. Within a reasonable period of time following the end of the Period of Restriction, the Company shall issue to the Participant or his beneficiary the number of Performance Shares specified in Section 1 of this Agreement, less any withholding required by Section 13 of this Agreement.

12.    Restrictive Legend. In the event the Participant is an “affiliate” of the Company (as defined by Rule 144 promulgated under the Securities Act of 1933, as amended), the Company may require that the shares to be issued to such Participant contain a legend in substantially the following form:

“THE HOLDER OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS AN “AFFILIATE” OF THE COMPANY (AS DEFINED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED), AND THEREFORE, THE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS.”

 

3

---

The Company shall issue such additional certificates as may be required to give effect to Section 14 of this Agreement.

Notwithstanding the foregoing provisions of this Section, the Company shall not be required to deliver any certificates for shares prior to: (a) the end of the Period of Restriction; (b) completing any registration or other qualification of the Shares, which the Company deems necessary or advisable under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body; and (c) obtaining any approval or other clearance from any federal or state governmental agency or body, which the Company determines to be necessary or advisable. The Company has no obligation to obtain the fulfillment of the conditions specified in the preceding sentence. As a further condition to the issuance of certificates for shares, the Company may require the making of any representation or warranty which the Company deems necessary or advisable under any applicable law or regulation.

13.    Income and Employment Tax Withholding. The Participant shall be solely responsible for paying to the Company all required federal, state, city and local income and employment taxes which arise on the vesting of the Performance Shares. The Committee, in its sole discretion and subject to such rules as it may adopt, shall require the Participant to satisfy any withholding tax obligation by having the Company retain Performance Shares which have a Fair Market Value, determined as of the date of payment for such Performance Shares to the Participant, equal to the amount of the minimum withholding tax to be satisfied by that retention.

14.    Mitigation of Excise Tax. The Participant acknowledges that the Performance Shares issued hereunder is subject to reduction by the Committee for the reasons specified in Section 13.9 of the Plan.

15.    Indemnity. The Participant hereby agrees to indemnify and hold harmless the Company and its Affiliates (and their respective directors, officers and employees), and the Committee, from and against any and all losses, claims, damages, liabilities and expenses based upon or arising out of the incorrectness or alleged incorrectness of any representation made by Participant to the Company or any failure on the part of the Participant to perform any agreements contained herein. The Participant hereby further agrees to release and hold harmless the Company and its Affiliates (and their respective directors, officers and employees) from and against any tax liability, including without limitation, interest and penalties, incurred by the Participant in connection with the Participant’s participation in the Plan.

16.    Financial Information. The Participant understands he or she is able to access the Company’s most recent quarterly balance sheet and quarterly income statement by visiting the following internet address: http://www.snl.com/Irweblinkx/finl.aspx?iid=100750.

17.    Changes in Shares. In the event of any change in the Shares, as described in Section 3.6 of the Plan, the Committee shall make appropriate adjustment or substitution in the number of Performance Shares, all as provided in the Plan. The Committee’s determination in this respect shall be final and binding upon all parties.

 

4

---

18.    Severability. In case any one or more of the provisions (or any portion thereof) contained herein will, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions (or portion thereof) had never been contained herein. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be unenforceable because of the provision’s scope, duration or other factor, then such provision shall be considered divisible and the court making such determination shall have the power to reduce or limit (but not increase or make greater) such scope, duration or other factor or to reform (but not increase or make greater) such provision to make it enforceable to the maximum extent permitted by law, and such provision shall then be enforceable against the appropriate party hereto in its reformed, reduced or limited form; provided, however, that a provision shall be enforceable in its reformed, reduced or limited form only in the particular jurisdiction in which a court of competent jurisdiction makes such determination.

19.    Effect of Headings. The descriptive headings of the Sections and, where applicable, subsections, of this Agreement are inserted for convenience and identification only and do not constitute a part of this Agreement for purposes of interpretation.

20.    Controlling Laws. Except to the extent superseded by the laws of the United States, the laws of the State of Indiana, without reference to the choice of law principles thereof, shall be controlling in all matters relating to this Agreement.

21.    Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which collectively shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Company, by its officer thereunder duly authorized, and the Participant, have caused this Performance Share Award Agreement to be executed as of the day and year first above written.

 

HORIZON BANCORP						PARTICIPANT
By:

 

ATTEST
By:

 

5

---

SCHEDULE A

PERFORMANCE GOALS AND EARNINGS LEVELS FOR PERFORMANCE PERIOD

 

Performance Goal		Weight		Threshold 50% Payout		Target 100% Payout		Maximum 125% Payout
Return on Common Equity: The ROCE of the Company compared with the ROCE of the banks included in the SNL Bank Index.		34%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile
Compounded Annual Growth Rate of Total Assets: The CAGR of total assets for the Company compared with the CAGR of total assets for the banks included SNL Bank Index.		33%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile
Return on Average Assets: The ROAA for the Company compared with the ROAA for the banks included in the SNL Bank Index.		33%		50th to 74th Percentile		75th to 84th Percentile		Greater than 84th Percentile

 

6

Exhibit 10.3

HORIZON BANCORP

2013 OMNIBUS EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

THIS AGREEMENT (the “Agreement”), made and executed as of the      day of             , 201  , between Horizon Bancorp, an Indiana corporation (the “Company”), and             , an officer or employee of the Company or one of its Affiliates, including but not limited to Horizon Bank, N.A. (the “Optionee”);

WITNESSETH:

WHEREAS, the Company has adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (the “Plan”), to further the growth and financial success of the Company and its Affiliates by aligning the interests of Optionees, through the ownership of Shares and through other incentives, with the interests of the Company’s shareholders; to provide Optionees with an incentive for excellence in individual performance; to promote teamwork among Optionees; to provide flexibility to the Company in its ability to motivate, attract and retain the services of Optionees who make significant contributions to the Company’s success; and to allow Optionees to share in the success of the Company; and

WHEREAS, it is the view of the Company that this goal can be achieved by granting incentive and nonqualified stock options to eligible officers and other key employees from time to time; and

WHEREAS, the Optionee has been designated by the Committee as an individual to whom stock options should be granted under the Plan as determined from the duties performed, the initiative and industry of the Optionee, and the Optionee’s potential contribution to the future development, growth and prosperity of the Company;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Optionee agree as follows:

1.    Grant of Option.

(a)    Aggregate Number of Shares. Subject to the provisions of Sections 5 and 7 of this Agreement, the Company hereby grants to the Optionee the right and option (“Option”) to purchase all or any part of an aggregate of              (            ) shares of common stock of the Company subject to the terms and conditions of this Agreement and the provisions of the Plan. All provisions of the Plan, including defined terms, are incorporated herein and expressly made a part of this Agreement by reference. The Optionee hereby acknowledges that he has received a copy of the Plan.

(b)    Designation of Character of Options. Pursuant to the authority of the Committee to determine the character of the options granted as incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”), of the total options granted under subsection (a), zero shares shall be ISOs and              shares shall be NSOs.

---

(c)    Tax Advice. The Optionee acknowledges and agrees that he shall be solely responsible for obtaining tax advice in connection with the grant and exercise of the Option and any disposition of the shares acquired in connection with the Option.

2.    Option Price.

(a)    Purchase Price. The purchase price of the shares of common stock represented by the Option granted under Section 1 shall be              and     /100 Dollars ($            ) (which is the Fair Market Value per share on the date the Option is granted).

(b)    Payment of Purchase Price. The exercise price for the stock covered by the Option granted under this Agreement shall be paid in cash by the Optionee at the time the Option is exercised; provided, however, with the approval of the Committee, and to the extent not prohibited under the Code or regulations issued thereunder, the Optionee may exercise part or all of this Option by tendering whole shares of common stock of the Company owned by the Optionee and which have been owned by the Optionee for more than six months, or by a combination of whole shares of Company common stock and cash, which have a Fair Market Value equal to the cash exercise price for the stock with respect to which the Option is exercised. For this purpose, any shares of the Company’s common stock so tendered shall be valued by the Committee at their Fair Market Value according to valuation criteria set forth in the Plan. The exercise of this Option shall be subject to such rules and procedures as shall be adopted from time to time by the Committee.

(c)    Cashless Exercise. Notwithstanding the provisions of Section 2(b) of this Agreement, the payment of the exercise price for the stock covered by the Option may be made, (a) through a “same day sale” commitment from the Optionee and an NASD dealer whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased in order to pay the exercise price, and whereby the NASD dealer irrevocably commits upon receipt of such stock to forward the exercise price directly to the Company, or (b) through a “margin” commitment from the Optionee and an NASD dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD dealer in a margin account as security for a loan from the NASD dealer in the amount of the exercise price and whereby the NASD dealer irrevocably commits upon receipt of such shares to forward the exercise price directly to the Company.

(d)    Net Exercise. Notwithstanding the provisions of Section 2(b) of this Agreement, the payment of the exercise price for the stock covered by the Option may be made by reducing the number of shares of common stock issued upon the exercise by the largest number of whole shares of common stock that has a Fair Market Value that does not exceed the aggregate exercise price for the shares of common stock exercised under this method.

(e)    Issuance of Certificates. Certificates evidencing the shares of stock purchased under this Option will not be delivered to the Optionee until full payment has been made for them and the Optionee shall have none of the rights of a shareholder with respect to such shares until those shares are issued to the Optionee. The Company shall not be required to issue or deliver any certificate(s) for shares of the stock purchased upon exercise of the Option prior to (i) completing any registration or other qualification of the shares, which the Company

 

2

---

deems necessary or advisable under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body; and (ii) obtaining any approval or other clearance from any federal or state governmental agency or body, which the Company determines to be necessary or advisable. The Company shall have no obligation to obtain the fulfillment of the conditions specified in the preceding sentence.

3.    Income and Employment Tax Withholding.

(a)    The Optionee shall be solely responsible for paying to the Company all required federal, state, city and local income and employment taxes applicable to the exercise of an NSO under the Plan.

(b)    Notwithstanding the provisions of subsection (a), with respect to stock to be issued pursuant to the exercise of an NSO, the Committee, in its sole discretion and subject to such rules as it may adopt from time to time, shall require the Optionee to satisfy any withholding tax obligation which may arise in connection with the exercise of the NSO by having the Company retain shares of stock which would otherwise be issued in connection with the exercise of the NSO or by accepting delivery from the Optionee of shares of Company stock which have a Fair Market Value, determined as of the date of the delivery of such shares, equal to the amount of the minimum withholding tax to be satisfied by that retention or delivery.

4.    Nontransferability. The Option granted hereunder shall not be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. The Option shall not be pledged or hypothecated in any way, nor shall it be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or other disposition of the Option in violation of this provision or the levy of execution, attachment or similar process upon the Option shall be null and void and without effect and shall cause the Option to be terminated.

5.    Exercise of Option.

(a)    Maximum Term and Vesting. The Option may not be exercised after the expiration of ten (10 ) years from the date of this Agreement, subject to earlier termination as provided in the Plan and this Agreement. Subject to the provisions of this Section 5 and Section 6, the Option shares shall vest and be exercisable by the Optionee in accordance with the following schedule:

 

		Percentage of Option Shares Vested and Exercisable
Date of Vesting		Percent Vested		Cumulative Vesting
/      /		33 percent		33 percent
/      /		33 percent		66 percent
/      /		34 percent		100 percent

Notwithstanding the foregoing, the Option shares shall also vest and be exercisable upon the Optionee’s death, Permanent and Total Disability or Retirement. In addition, the Option shares shall vest and be exercisable upon a Change in Control of the Company.

 

3

---

(b)    Limitations on Exercise. The Option may be exercised during the lifetime of the Optionee only by the Optionee or his guardian or attorney-in-fact in the event the Optionee becomes Permanently and Totally Disabled. In the case of the Optionee’s death, the Option may be exercised by the Optionee’s personal representative or administrator.

(c)    Legal Requirements. Notwithstanding any other provision of this Agreement, the Option may not be exercised in whole or in part if the issuance of the shares would constitute a violation of any applicable federal or state securities law or other applicable laws, rules or regulations. As a condition to the exercise of the Option, the Company may require the person exercising the Option to make any representation or warranty to the Company as may be required by any applicable law or regulation or as may be advised to the Company.

6.    Restrictive Legend. In the event the Optionee is an “affiliate” of the Company (as defined by Rule 144 promulgated under the Securities Act of 1933, as amended), the Company may require that the shares to be issued to such Optionee contain a legend in substantially the following form:

“THE HOLDER OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS AN “AFFILIATE” OF THE COMPANY (AS DEFINED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED), AND THEREFORE, THE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS.”

7.    Early Termination of Option.

(a)    In General. All rights to exercise this Option shall terminate 30 days after the effective date of the Optionee’s termination of employment with the Company and its Affiliates, but not later than the date the Option expires pursuant to its terms, unless the termination is For Cause or on account of the Permanent and Total Disability, death or Retirement of the Optionee. The transfer of the Optionee from the Company to an Affiliate or vice versa, or from one Affiliate to another, shall not be deemed a termination of employment.

(b)    For Cause Termination. If the Optionee’s employment is terminated For Cause, no previously unexercised Option granted under the Plan and this Agreement may be exercised. Rather, any unexercised Options, or part thereof, shall terminate effective on the date the Optionee receives notice of his termination For Cause.

(c)    Exercise on Disability or Death. If the Optionee becomes Permanently and Totally Disabled or dies while employed by the Company or any of its Affiliates, the Option shall be exercisable in full within one year after the date of his termination of employment due to Permanent and Total Disability or death (but not later than the date the Option expires pursuant to its terms) at which time the Option or any portion thereof remaining unexercised shall terminate. During such one year period immediately following the termination of employment

 

4

---

due to Permanent and Total Disability or death of the Optionee, the Option may be exercised in full, subject to the limitations of this Option, by the Optionee, by the Optionee’s guardian or attorney-in-fact, or by the Optionee’s personal representative or administrator, as the case may be; provided, however, the Option shall not be exercised after the expiration of ten (10) years from the date of this Agreement.

(d)    Exercise on Retirement. If the Optionee’s employment is terminated on or after satisfying the requirements for Retirement, the Option shall be exercisable in full within five years after the date of the Optionee’s termination of employment due to Retirement (but not later than the date on which the Option expires pursuant to its terms) at which time the Option, or any portion thereof remaining unexercised, shall terminate.

8.    Optionee’s Representations. The Optionee represents to the Company that:

(a)    The terms and arrangements relating to the grant of this Option and the stock to which it relates, and the offer thereof, have been arrived at or made through direct communication with the Company or a person acting in its behalf and such Optionee;

(b)    The Optionee has received a balance sheet and income statement of the Company and as an officer or key employee of the Company or its Affiliates:

 

(i)

is thoroughly familiar with the Company’s business affairs and financial condition;

 

(ii)

has been provided with or has access to such information (and has such knowledge and experience in financial and business matters that he is capable of utilizing such information) as is necessary to evaluate the risks, and make an informed investment decision with respect to, the grant of this Option and the stock to which it relates; and

 

(iii)

has sufficient financial resources so that he is able to bear the economic risks of his investment in this Option and such stock; and

(c)    This Option and the stock to which it relates is being acquired in good faith for investment purposes and not with a view to, or for sale in connection with, any distribution thereof.

9.    Indemnity. The Optionee hereby agrees to indemnify and hold harmless the Company and its Affiliates (and their respective directors, officers and employees), and the Committee, from and against any and all losses, claims, damages, liabilities and expenses based upon or arising out of the incorrectness or alleged incorrectness of any representation made by him to the Company or any failure on the part of him to perform any agreements contained herein. The Optionee hereby further agrees to release and hold harmless the Company and its Affiliates (and their respective directors, officers and employees) from and against any tax liability, including without limitation, interest and penalties, incurred by the Optionee in connection with his participation in the Plan.

 

5

---

10.    Financial Information. The Company hereby undertakes to deliver to the Optionee, at such time as they become available and so long as this Option is in effect and is unexercised in whole or in part, a balance sheet and income statement of the Company with respect to any fiscal year of the Company ending on or after the date of this Agreement.

11.    Conditions Precedent. In no event shall the Company be obligated to issue stock pursuant to this Option until it is satisfied that all conditions precedent to the issuance of the stock, as provided in the Plan and this Agreement, have been performed and completed, including the approval and adoption of the Plan by the shareholders and the Board of Directors of the Company.

12.    Changes in Stock. In the event of any change in the common stock of the Company, as described in Section 3.6 of the Plan, the Committee shall make the appropriate adjustment or substitution in the number, kind and price of shares under this Option, all as provided in the Plan. The Committee’s determination in this respect shall be final and binding upon all parties.

13.    Non-Disclosure; Return of Confidential Information and Other Property.

(a)    Access to Confidential Information. The Optionee understands, acknowledges and agrees that during the course of employment with the Company he has gained or shall gain information regarding, knowledge of and familiarity with the Confidential Information (as defined in subsection 13(c)) of the Company and any Affiliates and that if the Confidential Information was disclosed by the Optionee, the Company or Affiliate would suffer irreparable damage and harm. The Optionee understands, acknowledges and agrees that the Confidential Information derives substantial economic value from, among other reasons, not being known or readily ascertainable by proper means by others who could obtain economic value therefrom upon disclosure. The Optionee acknowledges and agrees that the Company and all Affiliates use reasonable means to maintain the secrecy and confidentiality of the Confidential Information.

(b)    Non-Disclosure. At all times while the Optionee is employed by the Company or any Affiliate, and at all times thereafter, the Optionee shall not (i) directly or indirectly disclose, provide or discuss any Confidential Information with or to any Person (as defined in subsection 13(d)) other than those directors, officers, employees, representatives and agents of the Company and any Affiliates who need to know such Confidential Information for a proper corporate purpose, and (ii) directly or indirectly use any Confidential Information (A) to compete against the Company or any Affiliates, or (B) for the Optionee’s own benefit or for the benefit of any Person other than the Company or any Affiliate.

(c)    Confidential Information Defined. For purposes of this Agreement, the term “Confidential Information” means any and all:

 

(i)

materials, records, data, documents, lists, writings and information (whether in writing, printed, verbal, electronic, computerized, on disk or otherwise) (A) relating or referring in any manner to the business, operations, affairs, financial condition, results of

 

6

---

operation, cash flow, assets, liabilities, sales, revenues, income, estimates, projections, policies, strategies, techniques, methods, products, developments, suppliers, relationships and/or customers of the Company or any Affiliate that are confidential, proprietary or not otherwise publicly available, in any event not without a breach of this Agreement, or (B) that the Company or any Affiliate has deemed confidential, proprietary or nonpublic;

 

(ii)

trade secrets of the Company or any Affiliate, as defined in Indiana Code Section 24-2-3-2, as amended, or any successor statute; and

 

(iii)

any and all copies, summaries, analyses and extracts which relate or refer to or reflect any of the items set forth in (i) or (ii) above. The Optionee agrees that all Confidential Information is confidential and is and at all times shall remain the property of, as applicable, the Company or any of the Affiliates.

(d)    Definition of Person. For purposes of this Agreement, the term “Person” shall mean any natural person, proprietorship, partnership, corporation, limited liability corporation, bank, organization, firm, business, joint venture, association, trust or other entity and any government agency, body or authority.

(e)    Return of Confidential Information and Other Property. The Optionee covenants and agrees:

 

(i)

to keep all Confidential Information subject to the Company’s or any Affiliate’s custody and control and to promptly return to the Company or the appropriate Affiliate all Confidential Information that is still in the Optionee’s possession or control at the termination of the Optionee’s employment with the Company; and

 

(ii)

promptly upon termination of the Optionee’s employment with the Company, to return to the Company, at the Company’s principal office, all vehicles, equipment, computers, credit cards and other property of the Company and to cease using any of the foregoing.

14.    Non-Solicitation of Employees and Other Representatives. During the term of the Optionee’s employment with Horizon Bank, N.A. (the “Bank”) and for twelve (12) months thereafter, (a) the Optionee will not directly or indirectly encourage, solicit, induce, or attempt to encourage, solicit, or induce any employee, agent, contractor, or representative of the Bank to terminate his/her employment or contractual relationship with the Bank (or devote less than full time and efforts to the Bank’s business), and (b) the Optionee will not directly or indirectly hire or attempt to hire: (i) for any competitive position with any competitor any person who is an employee, agent, contactor, or representative to the Bank at such time (or who has been an employee, agent, contractor, or representative of the Bank at any time within the preceding 180 days) or (ii) for any position with any business any person who is an employee, agent, contractor, or representative of the Bank at such time (or who has been an employee, agent, contractor, or representative of the Bank at any time within the preceding 180 days).

 

7

---

15.    Non-Solicitation of Customers During the term of the Optionee’s employment with the Bank and for twelve (12) months thereafter, the Optionee will not, in a competitive capacity, on behalf of any person or entity other than the Bank, directly or indirectly:

(a)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any customer of the Bank with whom the Optionee had contact (either directly or indirectly) or over which the Optionee had responsibility at any time in the one (1) year preceding the Optionee’s separation;

(b)    solicit, divert (or attempt to solicit or divert) or accept any competitive business from any customer of the Bank about whom the Optionee has obtained Confidential Information while employed by the Bank;

(c)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any identified prospective customer of the Bank with whom the Optionee had contact (either directly or indirectly) or over which the Optionee had responsibility at any time in the one (1) year preceding the Optionee’s separation; or

(d)    solicit, divert (or attempt to solicit or divert) or accept competitive business from any identified prospective customer of the Bank about whom the Optionee has obtained Confidential Information.

16.    Limited Covenant Not to Compete.

(a)    During the Optionee’s employment by the Bank, the Optionee shall not, directly or indirectly, have any ownership interest in, work for, advise, manage, act as an agent or consultant for, or have any business connection, or business or employment relationship, with any entity or person which competes with the Bank.

(b)    Moreover, for a period of              months after the Optionee’s separation from the Bank for any reason, the Optionee shall not:

 

(i)

Within the Indiana counties of              and the Michigan counties of             ;

 

(ii)

Within forty (40) miles of any Bank branch in, or for which the Optionee performed services or has been assigned responsibility, at any time within one (1) year preceding the Optionee’s separation; or

 

(iii)

in the Indiana and/or Michigan cities or towns for which the Optionee has been assigned responsibility, in writing, at any time within one (1) year preceding the Optionee’s separation;

 

8

---

directly or indirectly and in a competitive capacity own, manage, finance, operate, control, or participate in ownership, management, or operation of, act as an agent, consultant, or be employed with, any business engaged in the marketing, sale, or servicing of any service or product:

 

1)

with which the Optionee was involved during the Optionee’s last year of employment with the Bank; or

 

2)

which the Bank is developing, marketing, selling, or servicing (or plans to develop, market, sell, or service) and about which the Optionee gained any Confidential Information in the course of the Optionee s employment with the Bank.

(c)    For purposes of this Agreement, the term “competitive capacity” shall mean (i) performing tasks or duties similar to those the Optionee performed in the Optionee’s last year of employment at the Bank for a competitor of the Bank; (ii) managing/supervising those who, for a competitor of the Bank, perform tasks or duties similar to those which the Optionee performed in the Optionee’s last year of employment with the Bank; or (iii) performing, on behalf of a competitor of the Bank, tasks or duties in which the Optionee utilizes any Confidential Information that the Optionee learned in the course of the Optionee’s employment with the Bank.

17.    Periods of Noncompliance and Reasonableness of Periods. The restrictions and covenants contained in Sections 14, 15 and 16 shall be deemed not to run during all periods of noncompliance, the intention of the parties hereto being to have such restrictions and covenants apply during the Term of this Agreement and for the full periods specified in Sections 14, 15 and 16. The Company and the Optionee understand, acknowledge and agree that the restrictions and covenants contained in Sections 13, 14, 15 and 16 are reasonable in view of the nature of the business in which the Company and the Affiliates are engaged, the Optionee’s positions with the Company and/or the Bank and the Optionee’s advantageous knowledge of and familiarity with the business, operations, affairs and customers of the Company and the Affiliates, including but not limited to the Bank.

The Company’s obligation to pay the amounts otherwise payable to the Optionee pursuant to this Agreement shall immediately terminate in the event that the Optionee breaches any of the provisions of Sections 13, 14, 15 or 16. Notwithstanding the foregoing:

(a)    the covenants of the Optionee set forth in Sections 13, 14, 15 or 16 shall continue in full force and effect and be binding upon the Optionee;

(b)    the Company shall be entitled to the remedies specified in Section 19; and

(c)    the Company shall be entitled to its damages, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) resulting from or relating to the Optionee’s breach of any of the provisions of Sections 13, 14, 15 or 16.

18.    Survival of Certain Provisions. Upon any termination of the Optionee’s employment with the Bank, the Optionee and the Company hereby expressly agree that the provisions of Sections 13, 14, 15, 16, 17, 18 and 19 shall continue to be in full force and effect and binding upon the Optionee and the Company in accordance with the applicable respective provisions of such Sections.

 

9

---

19.    Remedies. The Optionee agrees that the Company or the Bank shall suffer irreparable damage and injury and shall not have an adequate remedy at law in the event of any actual, threatened or attempted breach by the Optionee of any provision of Sections 13, 14, 15 or 16. Accordingly, in the event of a breach or a threatened or attempted breach by the Optionee of any provision of Sections 13, 14, 15 or 16, in addition to all other remedies to which the Company and the Bank are entitled at law, in equity or otherwise, the Company and the Bank may be entitled to a temporary restraining order and a permanent injunction or a decree of specific performance of any provision of Sections 13, 14, 15 or 16. The foregoing remedies shall not be deemed to be the exclusive rights or remedies of the Company or the Bank for any breach of or noncompliance with this Agreement by the Optionee but shall be in addition to all other rights and remedies available to the Company or the Bank at law, in equity or otherwise.

20.    Severability. In case any one or more of the provisions (or any portion thereof) contained herein will, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions (or portion thereof) had never been contained herein. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be unenforceable because of the provision’s scope, duration or other factor, then such provision shall be considered divisible and the court making such determination shall have the power to reduce or limit (but not increase or make greater) such scope, duration or other factor or to reform (but not increase or make greater) such provision to make it enforceable to the maximum extent permitted by law, and such provision shall then be enforceable against the appropriate party hereto in its reformed, reduced or limited form; provided, however, that a provision shall be enforceable in its reformed, reduced or limited form only in the particular jurisdiction in which a court of competent jurisdiction makes such determination.

21.    Effect of Headings. The descriptive headings of the Sections and, where applicable, subsections of this Agreement are inserted for convenience and identification only and do not constitute a part of this Agreement for purposes of interpretation.

22.    Gender and Number. Where the context admits, words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural.

23.    Controlling Laws. Except to the extent superseded by the laws of the United States, the laws of the State of Indiana, without reference to the choice of law principles thereof, shall be controlling in all matters relating to this Agreement.

24.    Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which collectively shall constitute one and the same instrument.

 

10

---

IN WITNESS WHEREOF, the Company, by its officer thereunder duly authorized, and the Optionee, have caused this Horizon Bancorp Stock Option Agreement to be executed as of the day and year first above written, which is the date on which the Option is granted.

 

HORIZON BANCORP						OPTIONEE
By:

 

ATTEST
By:

 

11

Exhibit 10.4

HORIZON BANCORP

2013 OMNIBUS EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

THIS AGREEMENT (the “Agreement”), made and executed as of the      day of             , 201  , between Horizon Bancorp, an Indiana corporation (the “Company”), and             , an officer or employee of the Company or one of its Affiliates, including but not limited to Horizon Bank, N.A. (the “Optionee”);

WITNESSETH:

WHEREAS, the Company has adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (the “Plan”), to further the growth and financial success of the Company and its Affiliates by aligning the interests of Participants, through the ownership of Shares and through other incentives, with the interests of the Company’s shareholders; to provide Participants with an incentive for excellence in individual performance; to promote teamwork among Participants; to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company’s success; and to allow Participants to share in the success of the Company; and

WHEREAS, it is the view of the Company that this goal can be achieved by granting incentive and nonqualified stock options to eligible officers and other key employees from time to time; and

WHEREAS, the Optionee has been designated by the Committee as an individual to whom stock options should be granted under the Plan as determined from the duties performed, the initiative and industry of the Optionee, and the Optionee’s potential contribution to the future development, growth and prosperity of the Company;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Optionee agree as follows:

1.    Grant of Option.

(a)    Aggregate Number of Shares. Subject to the provisions of Sections 5 and 7 of this Agreement, the Company hereby grants to the Optionee the right and option (“Option”) to purchase all or any part of an aggregate of              (            ) shares of common stock of the Company subject to the terms and conditions of this Agreement and the provisions of the Plan. All provisions of the Plan, including defined terms, are incorporated herein and expressly made a part of this Agreement by reference. The Optionee hereby acknowledges that he has received a copy of the Plan.

(b)    Designation of Character of Options. Pursuant to the authority of the Committee to determine the character of the options granted as incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”), of the total options granted under subsection (a), zero shares shall be ISOs and              shares shall be NSOs.

---

(c)    Tax Advice. The Optionee acknowledges and agrees that he shall be solely responsible for obtaining tax advice in connection with the grant and exercise of the Option and any disposition of the shares acquired in connection with the Option.

2.    Option Price.

(a)    Purchase Price. The purchase price of the shares of common stock represented by the Option granted under Section 1 shall be              and     /100 Dollars ($            ) (which is the Fair Market Value per share on the date the Option is granted).

(b)    Payment of Purchase Price. The exercise price for the stock covered by the Option granted under this Agreement shall be paid in cash by the Optionee at the time the Option is exercised; provided, however, with the approval of the Committee, and to the extent not prohibited under the Code or regulations issued thereunder, the Optionee may exercise part or all of this Option by tendering whole shares of common stock of the Company owned by the Optionee and which have been owned by the Optionee for more than six months, or by a combination of whole shares of Company common stock and cash, which have a Fair Market Value equal to the cash exercise price for the stock with respect to which the Option is exercised. For this purpose, any shares of the Company’s common stock so tendered shall be valued by the Committee at their Fair Market Value according to valuation criteria set forth in the Plan. The exercise of this Option shall be subject to such rules and procedures as shall be adopted from time to time by the Committee.

(c)    Cashless Exercise. Notwithstanding the provisions of Section 2(b) of this Agreement, the payment of the exercise price for the stock covered by the Option may be made, (a) through a “same day sale” commitment from the Optionee and an NASD dealer whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased in order to pay the exercise price, and whereby the NASD dealer irrevocably commits upon receipt of such stock to forward the exercise price directly to the Company, or (b) through a “margin” commitment from the Optionee and an NASD dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD dealer in a margin account as security for a loan from the NASD dealer in the amount of the exercise price and whereby the NASD dealer irrevocably commits upon receipt of such shares to forward the exercise price directly to the Company.

(d)    Net Exercise. Notwithstanding the provisions of Section 2(b) of this Agreement, the payment of the exercise price for the stock covered by the Option may be made by reducing the number of shares of common stock issued upon the exercise by the largest number of whole shares of common stock that has a Fair Market Value that does not exceed the aggregate exercise price for the shares of common stock exercised under this method.

(e)    Issuance of Certificates. Certificates evidencing the shares of stock purchased under this Option will not be delivered to the Optionee until full payment has been made for them and the Optionee shall have none of the rights of a shareholder with respect to such shares until those shares are issued to the Optionee. The Company shall not be required to issue or deliver any certificate(s) for shares of the stock purchased upon exercise of the Option prior to (i) completing any registration or other qualification of the shares, which the Company

 

2

---

deems necessary or advisable under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body; and (ii) obtaining any approval or other clearance from any federal or state governmental agency or body, which the Company determines to be necessary or advisable. The Company shall have no obligation to obtain the fulfillment of the conditions specified in the preceding sentence.

3.    Income and Employment Tax Withholding.

(a)    The Optionee shall be solely responsible for paying to the Company all required federal, state, city and local income and employment taxes applicable to the exercise of an NSO under the Plan.

(b)    Notwithstanding the provisions of subsection (a), with respect to stock to be issued pursuant to the exercise of an NSO, the Committee, in its sole discretion and subject to such rules as it may adopt from time to time, shall require the Optionee to satisfy any withholding tax obligation which may arise in connection with the exercise of the NSO by having the Company retain shares of stock which would otherwise be issued in connection with the exercise of the NSO or by accepting delivery from the Optionee of shares of Company stock which have a Fair Market Value, determined as of the date of the delivery of such shares, equal to the amount of the minimum withholding tax to be satisfied by that retention or delivery.

4.    Nontransferability. The Option granted hereunder shall not be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. The Option shall not be pledged or hypothecated in any way, nor shall it be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or other disposition of the Option in violation of this provision or the levy of execution, attachment or similar process upon the Option shall be null and void and without effect and shall cause the Option to be terminated.

5.    Exercise of Option.

(a)    Maximum Term and Vesting. The Option may not be exercised after the expiration of ten (10) years from the date of this Agreement, subject to earlier termination as provided in the Plan and this Agreement. Subject to the provisions of this Section 5 and Section 6, the Option shares shall vest and be exercisable by the Optionee in accordance with the following schedule:

 

		Percentage of Option Shares Vested and Exercisable
Date of Vesting		Percent Vested		Cumulative Vesting
/      /		33 percent		33 percent
/      /		33 percent		66 percent
/      /		34 percent		100 percent

Notwithstanding the foregoing, the Option shares shall also vest and be exercisable upon the Optionee’s death, Permanent and Total Disability or Retirement. In addition, the Option shares shall vest and be exercisable upon a Change in Control of the Company.

 

3

---

(b)    Limitations on Exercise. The Option may be exercised during the lifetime of the Optionee only by the Optionee or his guardian or attorney-in-fact in the event the Optionee becomes Permanently and Totally Disabled. In the case of the Optionee’s death, the Option may be exercised by the Optionee’s personal representative or administrator.

(c)    Legal Requirements. Notwithstanding any other provision of this Agreement, the Option may not be exercised in whole or in part if the issuance of the shares would constitute a violation of any applicable federal or state securities law or other applicable laws, rules or regulations. As a condition to the exercise of the Option, the Company may require the person exercising the Option to make any representation or warranty to the Company as may be required by any applicable law or regulation or as may be advised to the Company.

6.    Restrictive Legend. In the event the Optionee is an “affiliate” of the Company (as defined by Rule 144 promulgated under the Securities Act of 1933, as amended), the Company may require that the shares to be issued to such Optionee contain a legend in substantially the following form:

“THE HOLDER OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS AN “AFFILIATE” OF THE COMPANY (AS DEFINED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED), AND THEREFORE, THE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS.”

7.    Early Termination of Option.

(a)    In General. All rights to exercise this Option shall terminate 30 days after the effective date of the Optionee’s termination of employment with the Company and its Affiliates, but not later than the date the Option expires pursuant to its terms, unless the termination is For Cause or on account of the Permanent and Total Disability, death or Retirement of the Optionee. The transfer of the Optionee from the Company to an Affiliate or vice versa, or from one Affiliate to another, shall not be deemed a termination of employment.

(b)    For Cause Termination. If the Optionee’s employment is terminated For Cause, no previously unexercised Option granted under the Plan and this Agreement may be exercised. Rather, any unexercised Options, or part thereof, shall terminate effective on the date the Optionee receives notice of his termination For Cause.

(c)    Exercise on Disability or Death. If the Optionee becomes Permanently and Totally Disabled or dies while employed by the Company or any of its Affiliates, the Option shall be exercisable in full within one year after the date of his termination of employment due to Permanent and Total Disability or death (but not later than the date the Option expires pursuant to its terms) at which time the Option or any portion thereof remaining unexercised shall terminate. During such one year period immediately following the termination of employment

 

4

---

due to Permanent and Total Disability or death of the Optionee, the Option may be exercised in full, subject to the limitations of this Option, by the Optionee, by the Optionee’s guardian or attorney-in-fact, or by the Optionee’s personal representative or administrator, as the case may be; provided, however, the Option shall not be exercised after the expiration of ten (10) years from the date of this Agreement.

(d)    Exercise on Retirement. If the Optionee’s employment is terminated on or after satisfying the requirements for Retirement, the Option shall be exercisable in full within five years after the date of the Optionee’s termination of employment due to Retirement (but not later than the date on which the Option expires pursuant to its terms) at which time the Option, or any portion thereof remaining unexercised, shall terminate.

8.    Optionee’s Representations. The Optionee represents to the Company that:

(a)    The terms and arrangements relating to the grant of this Option and the stock to which it relates, and the offer thereof, have been arrived at or made through direct communication with the Company or a person acting in its behalf and such Optionee;

(b)    The Optionee has received a balance sheet and income statement of the Company and as an officer or key employee of the Company or its Affiliates:

 

(i)

is thoroughly familiar with the Company’s business affairs and financial condition;

 

(ii)

has been provided with or has access to such information (and has such knowledge and experience in financial and business matters that he is capable of utilizing such information) as is necessary to evaluate the risks, and make an informed investment decision with respect to, the grant of this Option and the stock to which it relates; and

 

(iii)

has sufficient financial resources so that he is able to bear the economic risks of his investment in this Option and such stock; and

(c)    This Option and the stock to which it relates is being acquired in good faith for investment purposes and not with a view to, or for sale in connection with, any distribution thereof.

9.    Indemnity. The Optionee hereby agrees to indemnify and hold harmless the Company and its Affiliates (and their respective directors, officers and employees), and the Committee, from and against any and all losses, claims, damages, liabilities and expenses based upon or arising out of the incorrectness or alleged incorrectness of any representation made by him to the Company or any failure on the part of him to perform any agreements contained herein. The Optionee hereby further agrees to release and hold harmless the Company and its Affiliates (and their respective directors, officers and employees) from and against any tax liability, including without limitation, interest and penalties, incurred by the Optionee in connection with his participation in the Plan.

 

5

---

10.    Financial Information. The Company hereby undertakes to deliver to the Optionee, at such time as they become available and so long as this Option is in effect and is unexercised in whole or in part, a balance sheet and income statement of the Company with respect to any fiscal year of the Company ending on or after the date of this Agreement.

11.    Conditions Precedent. In no event shall the Company be obligated to issue stock pursuant to this Option until it is satisfied that all conditions precedent to the issuance of the stock, as provided in the Plan and this Agreement, have been performed and completed, including the approval and adoption of the Plan by the shareholders and the Board of Directors of the Company.

12.    Changes in Stock. In the event of any change in the common stock of the Company, as described in Section 3.6 of the Plan, the Committee shall make the appropriate adjustment or substitution in the number, kind and price of shares under this Option, all as provided in the Plan. The Committee’s determination in this respect shall be final and binding upon all parties.

13.    Effect of Headings. The descriptive headings of the Sections and, where applicable, subsections of this Agreement are inserted for convenience and identification only and do not constitute a part of this Agreement for purposes of interpretation.

14.    Gender and Number. Where the context admits, words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural.

15.    Controlling Laws. Except to the extent superseded by the laws of the United States, the laws of the State of Indiana, without reference to the choice of law principles thereof, shall be controlling in all matters relating to this Agreement.

16.    Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which collectively shall constitute one and the same instrument.

 

6

---

IN WITNESS WHEREOF, the Company, by its officer thereunder duly authorized, and the Optionee, have caused this Horizon Bancorp Stock Option Agreement to be executed as of the day and year first above written, which is the date on which the Option is granted.

 

HORIZON BANCORP						OPTIONEE
By:

 

ATTEST
By:

 

7

EXHIBIT 31.1

CERTIFICATION OF CRAIG M. DWIGHT

I, Craig M. Dwight, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Horizon Bancorp;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 4, 2015						/s/ Craig M. Dwight
						Craig M. Dwight
						Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF MARK E. SECOR

I, Mark E. Secor, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Horizon Bancorp;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 4, 2015						/s/ Mark E. Secor
						Mark E. Secor
						Chief Financial Officer

EXHIBIT 32

HORIZON BANCORP

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Horizon Bancorp (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 4, 2015						/s/ Craig M. Dwight
						Craig M. Dwight
						Chief Executive Officer
Dated: May 4, 2015
						/s/ Mark E. Secor
						Mark E. Secor
						Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Horizon Bancorp and will be retained by Horizon Bancorp and furnished to the Securities Exchange Commission or its staff upon request.