UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Commission file number 0-10792
Horizon Bancorp
(Exact name of registrant as specified in its charter)
| Indiana | 35-1562417 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 515 Franklin Square, Michigan City | 46360 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: 219-879-0211
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, no par value | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes o No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One)
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company ☑ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☑
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant, based on the average bid price of such stock as of June 30, 2010, the last day of the registrant's most recently completed second fiscal quarter, was approximately $49,926,000.
As of March 11, 2011, the registrant had 3,304,237 shares of Common Stock outstanding.
| Part of Form 10-K into which | ||
| Documents Incorporated by Reference Document | portion of document is incorporated | |
| Portions of the Registrant's Proxy Statement to be filed for its May 5, 2011 annual meeting of shareholders | III |
2010 Annual Report on Form 10-K
Table of Contents
| Page | ||||
PART I | ||||
Item 1 Business | 3 | |||
Item 1A Risk Factors | 19 | |||
Item 1B Unresolved Staff Comments | 30 | |||
Item 2 Properties | 30 | |||
Item 3 Legal Proceedings | 30 | |||
Item 4 (Removed and Reserved) | 31 | |||
Special Item: Executive Officers of Registrant | 31 | |||
PART II | ||||
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 32 | |||
Item 6 Selected Financial Data | 33 | |||
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation | 34 | |||
Item 7A Quantitative and Qualitative Disclosures about Market Risk | 56 | |||
Item 8 Financial Statements and Supplementary Data | 57 | |||
Item 9 Changes in and Disagreement with Accountants on Accounting and Financial Disclosure | 104 | |||
Item 9A Controls and Procedures | 104 | |||
Item 9B Other Information | 104 | |||
PART III | ||||
Item 10 Directors, Executive Officers and Corporate Governance | 105 | |||
Item 11 Executive Compensation | 105 | |||
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 106 | |||
Item 13 Certain Relationships and Related Transactions, and Director Independence | 106 | |||
Item 14 Principal Accountant Fees and Services | 106 | |||
PART IV | ||||
Item 15 Exhibits and Financial Statement Schedules | 107 | |||
SIGNATURES | 108 | |||
EXHIBIT INDEX | 110 | |||
2
(Table dollars in thousands except per share data)
PART I
ITEM 1. BUSINESS
The disclosures in this Item 1 are qualified by the disclosures below in Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, and in other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
General
Horizon Bancorp ("Horizon" or the "Company") is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northwestern Indiana and Southwestern Michigan through its bank subsidiary, Horizon Bank, N.A. (the "Bank") and other affiliated entities. Horizon's Common Stock is traded on the Nasdaq Global Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services and other services incident to banking.
On June 1, 2010 the Company announced the completion of the purchase of assets and the assumption of liabilities of American Trust & Savings Bank ("American") in Whiting, Indiana. The transaction was consummated on May 28, 2010. The Company purchased most of the banking-related assets of American totaling $107.8 million and assumed all the deposits, federal home loan bank advances, trust preferred securities, and accrued interest payable in the approximate amount of $110.3 million. The Company paid a deposit premium on core deposits of approximately $2.1 million and $500,000 in additional consideration. The Company engaged in this transaction in the expectation that it would realize increased profits through increasing its investment securities, loans, and deposits within a new market area. In total, the Bank maintains 21 full service offices and one loan production office in Northwest Indiana and Southwest Michigan. At December 31, 2010, the Bank had total assets of $1.4 billion and total deposits of $985.5 million. The Bank has three wholly-owned subsidiaries: Horizon Investments, Inc. ("Horizon Investments"), Horizon Insurance Services, Inc. ("Horizon Insurance") and Horizon Grantor Trust. Horizon Investments manages the investment portfolio of the Bank. Horizon Insurance offered a full line of personal and corporate insurance products until March 2005, at which time the majority of its assets were sold to a third party. Horizon Grantor Trust holds title to certain company owned life insurance policies.
Horizon formed Horizon Bancorp Capital Trust II in 2004 ("Trust II") and Horizon Bancorp Capital Trust III in 2006 ("Trust III") for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the acquisition of Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I ("Alliance Trust"). The Company also assumed additional debentures as the result of the American transaction, which formed Am Tru Statutory Trust I (Am Tru Trust). See Note 12 of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree.
No material part of Horizon's business is dependent upon a single or small group of customers, the loss of any one or more of whom would have a materially adverse effect on the business of Horizon. In 2010, revenues from loans accounted for 62% of the total consolidated revenue, and revenues from investment securities accounted for 16% of total consolidated revenue.
Employees
The Bank, Horizon Trust and Horizon Investments employed approximately 312 full and part-time employees as of December 31, 2010. Horizon Insurance and Horizon Grantor Trust do not have any employees.
Competition
A high degree of competition exists in all major areas where Horizon engages in business. The Bank's primary market consists of Porter, LaPorte, St. Joseph, Elkhart, and Lake Counties Indiana, and Berrien and Kalamazoo Counties Michigan. The Bank competes with other commercial banks as well as with savings and loan associations, consumer
3
(Table dollars in thousands except per share data)
finance companies and credit unions. To a more moderate extent, the Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services and certain government agencies.
Based on deposits as of June 30, 2010, Horizon was the largest of the 10 bank and thrift institutions in LaPorte County with a 32.92% market share and the sixth largest of the 14 institutions in Porter County with a 10.53% market share. In Berrien County, Michigan, Horizon was the fourth largest of the 10 bank and thrift institutions with a 7.28% market share. Horizon's market share of deposits in Lake County, Indiana was just over 1% at 1.48%, and less than 1% in each of the counties of St. Joseph and Elkhart Counties in Indiana and Kalamazoo County in Michigan. (Source: FDIC Summary of Deposits Market Share Reports, available at www.fdic.gov).
The Bank Holding Company Act
Horizon is registered as a bank holding company and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHC Act"). Federal Reserve Board policy has historically required bank holding companies to act as a source of financial and management strength for their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which was signed into law on July 21, 2010, codified this policy. Under this requirement, Horizon is required to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which Horizon might not otherwise do so. For this purpose, "source of financial strength" means Horizon's ability to provide financial assistance to the Bank in the event of the Bank's financial distress.
The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts Horizon's non-banking activities to those which are determined by the Federal Reserve to be so closely related to banking and a proper incident thereto.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.
Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines. The Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the "OCC") also have risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. For Horizon's regulatory capital ratios and regulatory requirements as of December 31, 2010, see the information in Management's Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below, which is incorporated herein by reference.
National Bank Act
The Bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve, and the FDIC.
Deposit Insurance
The Bank's deposits are insured to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"), which is generally $250,000 per depositor, subject to aggregation rules. In response to FDIC's increased costs resulting from the higher levels of bank failures that began in 2008, the Bank's FDIC expense has increased significantly. In addition to higher assessment rates, the Bank was required to pay a special FDIC assessment as of June 30, 2009, and also paid an assessment to participate in the FDIC Transaction Account Guarantee Program, as discussed below.
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(Table dollars in thousands except per share data)
The Federal Deposit Insurance Reform Act of 2005 (the "Reform Act"), resulted in significant changes to the federal deposit insurance program. Effective March 31, 2006, the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") were merged to create a new fund, called the Deposit Insurance Fund ("DIF").
The Bank is subject to deposit insurance assessment by the FDIC, which is a risk-related deposit insurance assessment system where premiums are based upon the institution's capital levels and risk profile. Under this system, insured institutions are assigned to one of four risk-weighted categories based on supervisory evaluations, regulatory capital levels, and certain other factors with less risky institutions paying lower assessments.
An institution's initial assessment rate depends upon the category to which it is assigned. Adjustments also are made to a bank's initial assessment rates based on levels of long-term unsecured debt, secured liabilities in excess of 252% of domestic deposits and, for certain institutions, brokered deposit levels. For 2010, initial assessments ranged from 12 to 45 basis points of assessable deposits, and the Bank paid assessments at the rate of 15 basis points for each $100 of insured deposits.
In November 2009, the FDIC issued a final rule that required banks to pay the fourth quarter FDIC assessment and to prepay estimated insurance assessments for the years 2010 through 2012. On December 30, 2009, the Bank paid an aggregate of $5.3 million in premiums, $5.0 million of which constituted prepaid premiums.
Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35%, and must achieve the 1.35% designated reserve ratio by September 30, 2020. The FDIC must offset the effect of the increase in the minimum designated reserve ratio from 1.15% to 1.35% on insured depository institutions of less than $10 billion, and may declare dividends to depository institutions when the reserve ratio at the end of a calendar quarter is at least 1.5%, although the FDIC has the authority to suspend or limit such permitted dividend declarations. In December, 2010, the FDIC adopted a final rule setting the designated reserve ratio for the deposit insurance fund at 2% of estimated insured deposits.
On October 19, 2010, the FDIC proposed a comprehensive long-range plan for deposit insurance fund management with the goals of maintaining a positive fund balance, even during periods of large fund losses, and maintaining steady, predictable assessment rates throughout economic and credit cycles. The FDIC determined not to increase assessments in 2011 by 3 basis points, as previously proposed, but to keep the current rate schedule in effect. In addition, the FDIC proposed adopting a lower assessment rate schedule when the designated reserve ratio reaches 1.15% so that the average rate over time should be about 8.5 basis points. In lieu of dividends, the FDIC proposed adopting lower rate schedules when the reserve ratio reaches 2% and 2.5%, so that the average rates will decline about 25 percent and 50 percent, respectively.
Under the Dodd-Frank Act, the assessment base for deposit insurance premiums is to be changed from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Tangible equity for this purpose means Tier 1 capital. Since this is a larger base than adjusted domestic deposits, assessment rates are expected to be lowered. In February 2011, the FDIC approved a new rule effective April 1, 2011 (to be reflected in invoices for assessments due September 30, 2011), which will implement these changes. The proposed rule includes new rate schedules scaled to the increase in the assessment base, including schedules that will go into effect when the reserve ratio reaches 1.15%, 2% and 2.5%. The FDIC staff projected that the new rate schedules would be approximately revenue neutral.
Effective April 1, 2011, the initial base assessment rates are as follows:
| • | For small Risk Category I banks, such as Horizon, the rates would range from 5-9 basis points. | ||
| • | The rates for small institutions in Risk Categories II, III and IV would be 14, 23 and 35 basis points, respectively. | ||
| • | For large institutions and large, highly complex institutions, the rate schedule ranges from 5 to 35 basis points. |
There are also adjustments made to the initial assessment rates based on long-term unsecured debt, depository institution debt, and brokered deposits.
5
(Table dollars in thousands except per share data)
The FDIC also revised the assessment system for large depository institutions with over $10 billion in assets.
In 2008, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010 (later extended to December 31, 2010) and, for a fee, certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the FDIC through December 31, 2012. The Bank made the business decision to participate in the unlimited noninterest bearing transaction account coverage, but Horizon and the Bank elected not to participate in the unsecured debt guarantee program. The assessments for unlimited noninterest bearing transaction account coverage for deposit amounts over $250,000 were 15 basis points per $100 of insured deposits during 2010.
The Dodd-Frank Act extended unlimited insurance on noninterest bearing accounts for no additional charges through December 31, 2012. Under this program, traditional noninterest demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held for a business, individual, or other type of depositor, are covered. Later, Congress added Lawyers' Trust Accounts (IOLTA) to this unlimited insurance protection through December 31, 2012.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.
FDIC-insured institutions also remain subject to the requirement to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. These assessments will continue until the FICO bonds are repaid between 2017 and 2019. During 2010, the FICO assessment rate ranged between 1.06 and 1.04 basis points for each $100 of insured deposits per quarter. For the first quarter of 2011, the FICO assessment rate is 1.02 basis points for each $100 in domestic deposits maintained at an institution.
General Regulatory Supervision
Both federal and state law extensively regulate various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Branching by the Bank is subject to the jurisdiction and requires notice to, or the prior approval of, the OCC. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the state is no longer required.
Transactions with Affiliates and Insiders
Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks, affiliated companies and their executive officers, including limits on credit transactions between these parties. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.
Effective July 21, 2011, among other changes, the Dodd-Frank Act will eliminate the exceptions under Section 23A of the Federal Reserve Act for transactions with financial subsidiaries and will expand the scope of transactions treated as "covered transactions" to include derivatives transactions and securities repurchase agreements. The Dodd-Frank Act also expands the types of transactions subject to insider lending limits.
Capital Regulation
The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. Risk-based capital ratios are determined by allocating
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(Table dollars in thousands except per share data)
assets and specified off-balance sheet commitments to four risk weighted categories of 0%, 20%, 50%, or 100%, with higher levels of capital being required for the categories perceived as representing greater risk.
The capital guidelines divide a bank holding company's or bank's capital into two tiers. The first tier ("Tier I") includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary capital ("Tier II") includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks and bank holding companies are required to maintain a total risk-based capital ratio of at least 8%, of which 4% must be Tier I capital. The federal banking regulators may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Also required by the regulations is the maintenance of a leverage ratio designed to supplement the risk-based capital guidelines. This ratio is computed by dividing Tier I capital, net of all intangibles, by the quarterly average of total assets. The minimum leverage ratio is 3% for the most highly rated institutions, and 1% to 2% higher for institutions not meeting those standards. Pursuant to the regulations, banks must maintain capital levels commensurate with the level of risk, including the volume and severity of problem loans to which they are exposed.
In December 2008, the Company received $25,000,000 in exchange for 25,000 shares of its Fixed Rate Cumulative Preferred Stock, Series A, issued to the Treasury Department, and related warrants. Of that amount, $20,000,000 was contributed to the Bank. As a result, the Company's and the Bank's regulatory capital have increased significantly from the capital reported in prior periods. On November 3, 2010, the Company received approval to redeem 25%, or $6.25 million, of the Treasury's original $25.0 million preferred stock investment in the Company from the Capital Purchase Program, which is a program of the Troubled Assets Relief Program ("TARP"). On November 10, 2010, the Company completed the redemption process reducing the Treasury's preferred stock investment in the Company to $18.75 million.
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(Table dollars in thousands except per share data)
The following is a summary of Horizon's and the Bank's regulatory capital and capital requirements at December 31, 2010.
| For Capital 1 | For Well 1 | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Capitalized Purposes | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||
Total capital 1 (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 144,941 | 15.07 | % | $ | 76,943 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | 133,893 | 13.96 | % | 76,730 | 8.00 | % | $ | 95,912 | 10.00 | % | ||||||||||||||
| ||||||||||||||||||||||||
Tier 1 capital 1 (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 132,860 | 13.81 | % | 38,482 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 121,812 | 12.70 | % | 38,366 | 4.00 | % | 57,549 | 6.00 | % | |||||||||||||||
| ||||||||||||||||||||||||
Tier 1 capital 1 (to average assets) | ||||||||||||||||||||||||
Consolidated | 132,860 | 9.37 | % | 56,717 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 121,812 | 8.60 | % | 56,657 | 4.00 | % | 70,821 | 5.00 | % | |||||||||||||||
| 1 | As defined by regulatory agencies |
The Dodd-Frank Act also requires the Federal Reserve to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries except that bank holding companies with less than $500 million in assets are exempt from these capital requirements.
Prompt Corrective Regulatory Action.
Federal law provides the federal banking regulators with broad powers to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: (i) requiring the submission of a capital restoration plan; (ii) placing limits on asset growth and restrictions on activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions with affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. At December 31, 2010, the Bank was categorized as "well capitalized," meaning that the Bank's total risk-based capital ratio exceeded 10%, the Bank's Tier I risk-based capital ratio exceeded 6%, the Bank's leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.
Anti-Money Laundering and the USA Patriot Act
Horizon is subject to the provisions of the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes.
Sarbanes-Oxley Act of 2002
Horizon also is subject to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), which revised the laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act applies to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for
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(Table dollars in thousands except per share data)
violation of the securities laws. Management expects that significant additional efforts and expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.
The Securities and Exchange Commission has adopted final rules implementing Section 404 of the Sarbanes-Oxley Act of 2002. In each Form 10-K it files, Horizon is required to include a report of management on Horizon's internal control over financial reporting. The internal control report must include a statement of management's responsibility for establishing and maintaining adequate control over financial reporting of Horizon, identify the framework used by management to evaluate the effectiveness of Horizon's internal control over financial reporting and provide management's assessment of the effectiveness of Horizon's internal control over financial reporting. Significant efforts were required to comply with Section 404 and Horizon anticipates additional efforts will be required in future years.
Recent Legislative Developments
Emergency Economic Stabilization Act of 2008 and Troubled Asset Relief Program's Capital Purchase Program
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. Pursuant to the EESA, the U.S. Department of Treasury (the "Treasury") has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Treasury also announced it would offer to qualifying U.S. banking organizations the opportunity to sell preferred stock, along with warrants to purchase common stock, to the Treasury on what may be considered attractive terms under the Troubled Asset Relief Program ("TARP") Capital Purchase Program (the "CPP"). The CPP allows financial institutions, like Horizon, to issue non-voting preferred stock to the Treasury in an amount ranging between 1% and 3% of the institution's total risk-weighted assets.
Although both Horizon and the Bank met all applicable regulatory capital requirements and were well capitalized, Horizon determined that obtaining additional capital pursuant to the CPP for contribution in whole or in part to the Bank was advisable given the then current economic recession and the benefits the additional capital provides in managing through an economic recession. As a result, Horizon decided to participate in the CPP Program and sold $25,000,000 of its Fixed Rate Cumulative Preferred Stock, Series A to the Treasury on December 19, 2007.
The general terms of the preferred stock issued by Horizon under the CPP are as follows:
| • | Dividends at the rate of 5% per annum, payable quarterly in arrears, are required to be paid on the preferred stock for the first five years and dividends at the rate of 9% per annum are required thereafter until the stock is redeemed by Horizon; | ||
| • | Without the prior consent of the Treasury, Horizon will be prohibited from increasing its common stock dividends or repurchasing its common stock for the first three years while Treasury is an investor; | ||
| • | During the first three years the preferred stock is outstanding, Horizon will be prohibited from repurchasing such preferred stock, except with the proceeds from a sale of Tier 1 qualifying common or other preferred stock of Horizon in an offering that raises at least 25% of the initial offering price of the preferred stock sold to the Treasury ($6,250,000). After the first three years, the preferred stock can be redeemed at any time with any available cash; | ||
| • | Under the CPP, Horizon also issued to the Treasury warrants entitling the Treasury to buy 212,104 shares of Horizon's common stock at an exercise price of $17.68 per share; and | ||
| • | Horizon agreed to certain compensation restrictions for its senior executive officers and restrictions on the amount of executive compensation which is tax deductible. |
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the "ARRA"). The ARRA amended, among other things, the TARP Program legislation by directing the Treasury Department to issue regulations implementing strict limitations on compensation paid or accrued by financial institutions, like Horizon, participating in the TARP Program. These limitations include:
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(Table dollars in thousands except per share data)
| • | A prohibition on paying or accruing bonus, incentive or retention compensation for our President and Chief Executive Officer, other than certain awards of long-term restricted stock or bonuses payable under existing employment agreements; | ||
| • | A prohibition on making any payments to the executive officers of Horizon and the next five most highly compensated employees for departure from Horizon other than compensation earned for services rendered or accrued benefits; | ||
| • | Subjecting bonus, incentive and retention payments made to the executive officers of Horizon and the next 20 most highly compensated employees to repayment (clawback) if based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate; | ||
| • | A prohibition on any compensation plan that would encourage manipulation of reported earnings; | ||
| • | Establishment by the Board of Directors of a company-wide policy regarding excessive or luxury expenditures including office and facility renovations, aviation or other transportation services and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or similar measures in the ordinary course of business; | ||
| • | Submitting a "say-on-pay" proposal to a non-biding vote of shareholders at future annual meetings, whereby shareholders vote to approve the compensation of executives as disclosed pursuant to the executive compensation disclosures included in the proxy statement; and | ||
| • | A review by the U.S. Department of Treasury of any bonus, retention awards or other compensation paid to the executive officers of Horizon and the next 20 most highly compensated employees prior to February 17, 2009 to determine if such payments were excessive and negotiate for the reimbursement of such excess payments. |
On June 10, 2009, Treasury issued an interim final rule implementing and providing guidance on the executive compensation and corporate governance provisions of EESA, as amended by ARRA. The regulations were published in the Federal Register on June 15, 2009, and set forth the following requirements:
| • | Evaluation of employee compensation plans and potential to encourage excessive risk or manipulation of earnings. | ||
| • | Compensation committee discussion, evaluation and review of senior executive officer compensation plans and other employee compensation plans to ensure that they do not encourage unnecessary and excessive risk. | ||
| • | Compensation committee discussion, evaluation and review of employee compensation plans to ensure that they do not encourage manipulation of reported earnings. | ||
| • | Compensation committee certification and disclosure requirements regarding evaluation of employee compensation plans. | ||
| • | "Clawback" of bonuses. | ||
| • | Prohibition on golden parachute payments based on materially inaccurate financial statements or performance metrics. | ||
| • | Limitation on bonus payments, retention awards and incentive compensation. | ||
| • | Disclosure regarding perquisites and compensation consultants; prohibition on gross-ups. | ||
| • | Luxury or excessive expenditures policy. | ||
| • | Shareholder advisory resolution on executive compensation. | ||
| • | Annual compliance certification by principal executive officer and principal financial officer. | ||
| • | Establishment of the Office of the Special Master for TARP Executive Compensation with authority to review certain payments and compensation structures. |
On October 22, 2009, the Federal Reserve issued proposed supervisory guidance designed to ensure that incentive compensation practices of banking organizations are consistent with safety and soundness. Uncertainty exists regarding the interpretation and application of this guidance, and the impact of the guidance on recruitment, retention and motivation of key officers and employees.
ARRA was followed by numerous actions by the Federal Reserve, Congress, Treasury, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourage loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action
10
(Table dollars in thousands except per share data)
against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; coordinated international efforts to address illiquidity and other weaknesses in the banking sector; and legislation that would require creditors that transfer loans and securitizations of loans to maintain a material portion (generally at least 10%) of the credit risk of the loans transferred or securitized.
On November 10, 2010, Horizon repurchased 6,250 of the 25,000 outstanding Series A Preferred Shares held by the Treasury. Horizon paid $6.25 million to repurchase the preferred shares along with the accrued dividend for the shares repurchased. Horizon has also applied for a $19 million loan under the recently implemented Small Business Loan Fund program (the "SBLF"), and if its application is approved, Horizon plans to repurchase the remaining $18.5 million in Series A Preferred Shares from the Treasury with those proceeds. Enacted into law as part of the Small Business Jobs Act of 2010, the SBLF is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The SBLF program provides an option for community banks to refinance preferred stock issued to the Treasury through the Capital Purchase Program, and the SBLF program does not impose many of the restrictions that Horizon is currently subject to under TARP. There can be no assurance, however, that Horizon will receive the SBLF funds, and if Horizon does not receive the funds, Horizon's plan is to repurchase the remaining preferred shares over the next three years from earnings.
Other Regulation
In addition to the matters discussed above, the Bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit, and collection activities and regulations affecting secondary mortgage market activities.
Effect of Governmental Monetary Policies
The Bank's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from funds deposited by banks and savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis.
As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 2010, the Bank's investment in stock of the FHLB of Indianapolis was $11.4 million. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate income housing projects. For the year ended December 31, 2010, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately $214,000, for an annualized rate of 1.9%.
11
(Table dollars in thousands except per share data)
Limitations on Rates Paid for Deposits
FDIC regulations place limitations on the interest rates that less than well-capitalized insured depository institutions may pay on deposits. Under these regulations, "well capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of federal law. Management does not believe that these regulations will have a materially adverse effect on the Bank's current operations.
Legislative Initiatives
Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or Horizon and its affiliates will be affected.
Recent Legislative Developments
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies.
The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of Horizon in substantial and unpredictable ways. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time.
Horizon's management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on the business, financial condition and results of operations of Horizon. The ultimate effect of the Dodd-Frank Act on the financial services industry in general, and Horizon in particular, is uncertain at this time. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on Horizon and the financial services industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits.
Consumer Financial Protection Bureau.
The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau ("CFPB"), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with
12
(Table dollars in thousands except per share data)
the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates.
Mortgage Reform and Anti-Predatory Lending
Title XIV of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act, includes a series of amendments to the Truth In Lending Act with respect to mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and pre-payments. With respect to mortgage loan originator compensation, except in limited circumstances, an originator is prohibited from receiving compensation that varies based on the terms of the loan (other than the principal amount). The amendments to the Truth In Lending Act also prohibit a creditor from making a residential mortgage loan unless it determines, based on verified and documented information of the consumer's financial resources, that the consumer has a reasonable ability to repay the loan. The amendments also prohibit certain pre-payment penalties and require creditors offering a consumer a mortgage loan with a pre-payment penalty to offer the consumer the option of a mortgage loan without such a penalty. In addition, the Dodd-Frank Act expands the definition of a "high-cost mortgage" under the Truth In Lending Act, and imposes new requirements on high-cost mortgages and new disclosure, reporting and notice requirements for residential mortgage loans, as well as new requirements with respect to escrows and appraisal practices.
Interchange Fees for Debit Cards
Under the Dodd-Frank Act, interchange fees for debit card transactions must be reasonable and proportional to the issuer's incremental cost incurred with respect to the transaction plus certain fraud related costs. Although institutions with total assets of less than $10 billion are exempt from this requirement, competitive pressures are likely to require smaller depository institutions, like Horizon, to reduce fees with respect to these debit card transactions.
13
(Table dollars in thousands except per share data)
BANK HOLDING COMPANY STATISTICAL DISCLOSURES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
Information required by this section of Securities Act Industry Guide 3 is presented in Management's Discussion and Analysis as set forth in Item 7 below, herein incorporated by reference.
II. INVESTMENT PORTFOLIO
| A. | The following is a schedule of the amortized cost and fair value of investment securities available for sale and held to maturity. |
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Treasury and federal agencies | $ | 24,727 | $ | 25,251 | $ | 19,612 | $ | 20,085 | $ | 23,661 | $ | 24,914 | ||||||||||||
State and municipal | 132,380 | 131,489 | 107,160 | 109,149 | 88,282 | 86,985 | ||||||||||||||||||
| ||||||||||||||||||||||||
Federal agency collateralized mtg. obligations | 100,106 | 101,837 | 76,222 | 77,289 | 8,702 | 8,925 | ||||||||||||||||||
Federal agency mortgage-backed pools | 114,390 | 117,895 | 113,633 | 118,661 | 174,227 | 176,389 | ||||||||||||||||||
Private labeled mortgage-backed pools | 5,197 | 5,323 | 7,779 | 7,606 | 4,361 | 4,026 | ||||||||||||||||||
Corporate notes | 555 | 549 | 355 | 342 | 587 | 399 | ||||||||||||||||||
Total available for sale | 377,355 | 382,344 | 324,761 | 333,132 | 299,820 | 301,638 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total held to maturity, state and municipal | 9,595 | 9,595 | 11,657 | 11,687 | 1,630 | 1,634 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total investment securities | $ | 386,950 | $ | 391,939 | $ | 336,418 | $ | 344,819 | $ | 301,450 | $ | 303,272 | ||||||||||||
| B. | The following is a schedule of maturities of each category of available for sale and held to maturity debt securities and the related weighted-average yield of such securities as of December 31, 2010: |
| After One Year | After Five Years | |||||||||||||||||||||||||||||||
| One Year or Less | Through Five Years | Through Ten Years | After Ten Years | |||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies (1) | $ | - | 0.00 | % | $ | 10,972 | 2.89 | % | $ | 4,894 | 2.63 | % | $ | 9,385 | 5.65 | % | ||||||||||||||||
State and municipal | 866 | 2.58 | % | 17,977 | 3.55 | % | 39,555 | 3.99 | % | 73,091 | 4.20 | % | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Collateralized mtg. obligations (2) | - | 0.00 | % | - | 0.00 | % | 11,211 | 4.42 | % | 95,949 | 3.76 | % | ||||||||||||||||||||
Federal agency mortgage-backed pools (2) | 558 | 4.10 | % | 1,900 | 4.11 | % | 21,238 | 3.96 | % | 94,199 | 4.42 | % | ||||||||||||||||||||
Corporate notes | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 549 | 0.00 | % | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Total available for sale | $ | 1,424 | 3.18 | % | $ | 30,849 | 3.35 | % | $ | 76,898 | 3.96 | % | $ | 273,173 | 4.16 | % | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
Total held to maturity, state and municipal | $ | 9,495 | 2.65 | % | $ | 100 | 3.35 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Total investment securities | $ | 10,919 | 2.72 | % | $ | 30,949 | 3.35 | % | $ | 76,898 | 3.96 | % | $ | 273,173 | 4.16 | % | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
| (1) | Fair value is based on contractual maturity or call date where a call option exists | |
| (2) | Maturity based upon final maturity date |
| The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis. |
| Excluding those holdings of the investment portfolio in Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded 10% of the consolidated stockholders' equity of Horizon at December 31, 2010. |
14
(Table dollars in thousands except per share data)
III. LOAN PORTFOLIO
| A. | Types of Loans - Total loans on the balance sheet are comprised of the following classifications for the years indicated. |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Commercial | $ | 330,018 | $ | 314,517 | $ | 310,842 | $ | 307,535 | $ | 271,457 | ||||||||||
Real estate | 162,435 | 133,892 | 167,766 | 216,019 | 222,235 | |||||||||||||||
Mortgage warehouse | 123,743 | 166,698 | 123,287 | 78,225 | 112,267 | |||||||||||||||
Consumer | 266,681 | 271,210 | 280,072 | 287,073 | 237,875 | |||||||||||||||
| 882,877 | 886,317 | 881,967 | 888,852 | 843,834 | |||||||||||||||
Allowance for loan losses | (19,064 | ) | (16,015 | ) | (11,410 | ) | (9,791 | ) | (8,738 | ) | ||||||||||
Total loans | $ | 863,813 | $ | 870,302 | $ | 870,557 | $ | 879,061 | $ | 835,096 | ||||||||||
| B. | Maturities and Sensitivities of Loans to Changes in Interest Rates - The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage, mortgage warehousing and installment loans, as of December 31, 2010: |
| One Year | One Through | After Five | ||||||||||||||
| or Less | Five Years | Years | Total | |||||||||||||
Maturing or repricing Commercial, financial,agricultural and commercial tax-exempt loans | $ | 259,709 | $ | 60,694 | $ | 9,614 | $ | 330,017 | ||||||||
| The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.) |
| Fixed | Variable | |||||||
| Rate | Rate | |||||||
Total commercial, financial, agricultural and commercial tax-exempt loans due after one year | $ | 69,729 | $ | 43,036 | ||||
15
(Table dollars in thousands except per share data)
C. Risk Elements
| Non-accrual, Past Due and Restructured Loans - The following schedule summarizes non-accrual, past due and restructured loans. |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Non-performing loans | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
More than 90 days past due | $ | - | $ | 1,086 | $ | 49 | $ | - | $ | - | ||||||||||
Non-accrual | 7,508 | 8,143 | 5,118 | 1,870 | 1,768 | |||||||||||||||
Trouble debt restructuring - accruing | 574 | - | - | - | - | |||||||||||||||
Trouble debt restructuring - non-accrual | - | - | - | - | - | |||||||||||||||
Real estate | ||||||||||||||||||||
More than 90 days past due | 222 | 296 | 464 | - | 89 | |||||||||||||||
Non-accrual | 5,483 | 1,257 | 1,440 | 512 | 614 | |||||||||||||||
Trouble debt restructuring - accruing | 3,380 | 3,266 | - | - | - | |||||||||||||||
Trouble debt restructuring - non-accrual | 241 | - | - | - | - | |||||||||||||||
Mortgage warehouse | ||||||||||||||||||||
More than 90 days past due | - | - | - | - | - | |||||||||||||||
Non-accrual | - | - | - | - | - | |||||||||||||||
Trouble debt restructuring - accruing | - | - | - | - | - | |||||||||||||||
Trouble debt restructuring - non-accrual | - | - | - | - | - | |||||||||||||||
Consumer | ||||||||||||||||||||
More than 90 days past due | 136 | 376 | 318 | 87 | 55 | |||||||||||||||
Non-accrual | 3,682 | 2,515 | 474 | 480 | 99 | |||||||||||||||
Trouble debt restructuring - accruing | 165 | 206 | - | - | - | |||||||||||||||
Trouble debt restructuring - non-accrual | 37 | - | - | - | - | |||||||||||||||
Total non-performing loans | 21,428 | 17,145 | 7,863 | 2,949 | 2,625 | |||||||||||||||
Other real estate owned and repossessed collateral | ||||||||||||||||||||
Commercial | 1,622 | 544 | - | - | - | |||||||||||||||
Real estate | 1,042 | 1,186 | 2,772 | 238 | 75 | |||||||||||||||
Mortgage warehouse | - | - | - | - | - | |||||||||||||||
Consumer | - | 23 | 207 | 303 | 120 | |||||||||||||||
Total other real estate owned and repossessed collateral | 2,664 | 1,753 | 2,979 | 541 | 195 | |||||||||||||||
Total non-performing assets | $ | 24,092 | $ | 18,898 | $ | 10,842 | $ | 3,490 | $ | 2,820 | ||||||||||
Gross interest income that would have been recorded on non-accrual loans outstanding as of December 31, 2010, in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period. | $ | 1,437 | ||
Interest income actually recorded on non-accrual loans outstanding as of December 31, 2010, and included in net income for the period. | 693 | |||
| ||||
Interest income not recognized during the period on non-accrual loans outstanding as of December 31, 2010. | $ | 744 | ||
| ||||
Discussion of Non-Accrual Policy
| 1. | From time to time, the Bank obtains information, which may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of such, it is management's policy to convert the loan from an "earning asset" to a non-accruing loan. Further, it is management's policy to place a commercial loan on a non-accrual status when delinquent in excess of 90 days or have had the accrual of interest discontinued by |
16
(Table dollars in thousands except per share data)
| management. The officer responsible for the loan, the Chief Operating Officer and the senior collection officer must review all loans placed on non-accrual status. |
| 2. | Potential Problem Loans: | ||
| Impaired and non-accrual loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $21.4 million and $17.1 million at December 31, 2010 and 2009. The allowance for impaired and non-accrual loans, included in the Bank's allowance for loan losses totaled $3.4 million and $3.5 million at those respective dates. The average balance of impaired loans during 2010 and 2009 was $8.1 million and $14.3 million. |
| 3. | Foreign Outstandings: | ||
| None |
| 4. | Loan Concentrations: | ||
| As of December 31, 2010, there are no significant concentrations of loans exceeding 10% of total loans. See Item III A above for a listing of the types of loans by concentration. |
D. Other Interest-Bearing Assets
| There are no other interest-bearing assets as of December 31, 2010, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans. |
IV. SUMMARY OF LOAN LOSS EXPERIENCE
| A. | The following is an analysis of the activity in the allowance for loan losses account: |
| December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Loans outstanding at the end of the period (1) | $ | 882,877 | $ | 886,317 | $ | 881,967 | $ | 888,852 | $ | 843,834 | ||||||||||
Average loans outstanding during the period (1) | 878,181 | 892,431 | 848,279 | 853,314 | 780,555 | |||||||||||||||
| ||||||||||||||||||||