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HORIZON BANCORP
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
450 5th Street N.W.
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 2002
------------------
Commission file number 0-10792
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HORIZON BANCORP
---------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 879-0211
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Securities registered pursuant to Section 12(b) of the Act:
NONE
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of class)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,982,700 at OCTOBER 30, 2002
--------- ----------------
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
SEPTEMBER 30,
2002 December 31,
(UNAUDITED) 2001
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 21,161 $ 18,608
Interest-bearing demand deposits 9 20
Federal funds sold 28,000
------------------------
Cash and cash equivalents 49,170 18,628
Interest-bearing deposits 252 247
Investment securities, available for sale 114,113 67,338
Loans held for sale 5,913 6,816
Loans, net of allowance for loan losses of
$5,818 and $5,410 497,257 461,391
Premises and equipment 15,828 16,197
Federal Reserve and Federal Home Loan Bank stock 8,329 6,738
Interest receivable 3,421 3,209
Other assets 5,127 7,381
------------------------
Total assets $ 699,410 $ 587,945
========================
LIABILITIES
Deposits
Noninterest bearing $ 57,177 $ 43,353
Interest bearing 428,884 376,246
------------------------
Total deposits 486,061 419,599
Short-term borrowings 22,434 22,344
Federal Home Loan Bank advances 132,112 105,293
Guaranteed preferred beneficial interests in
Horizon Bancorp's subordinated debentures 12,000
Interest payable 762 765
Other liabilities 5,397 5,001
------------------------
Total liabilities 658,766 553,002
------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.33 1/3 stated value
Authorized, 15,000,000
Issued, 3,115,284 shares 1,038 1,038
Additional paid-in capital 20,808 20,808
Retained earnings 31,161 28,130
Accumulated other comprehensive income 3,162 430
Less treasury stock, at cost, 1,132,587
and 1,129,587 shares (15,525) (15,463)
------------------------
Total stockholders' equity 40,644 34,943
------------------------
Total liabilities and stockholders' equity $ 699,410 $ 587,945
========================
See notes to consolidated financial statements.
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollar Amounts in Thousands, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable $ 9,125 $8,796 $25,608 $27,334
Investment securities
Taxable 1,326 1,048 3,685 3,441
Tax exempt 377 6 847 19
-------------------------------------
Total interest income 10,828 9,850 30,140 30,794
-------------------------------------
INTEREST EXPENSE
Deposits 2,707 3,705 8,092 12,898
Federal funds purchased and
short-term borrowings 116 45 286 261
Federal Home Loan Bank advances 1,764 1,222 4,645 3,370
Subordinated debentures 167 348
-------------------------------------
Total interest expense 4,754 4,972 13,371 16,529
-------------------------------------
NET INTEREST INCOME 6,074 4,878 16,769 14,265
Provision for loan losses 375 300 1,125 1,005
-------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,699 4,578 15,644 13,260
-------------------------------------
OTHER INCOME
Service charges on deposit accounts 772 569 2,155 1,632
Fiduciary activities 593 591 1,776 2,035
Commission income from insurance
agency 213 190 548 659
Income from reinsurance company 12 21 40 64
Gain on sale of loans 1,302 581 2,280 1,639
Wire transfer fee income 201 129 550 388
Other income 146 202 404 557
-------------------------------------
Total other income 3,239 2,283 7,753 6,974
-------------------------------------
OTHER EXPENSES
Salaries and employee benefits 3,145 2,740 9,176 8,296
Net occupancy expenses 414 433 1,256 1,322
Data processing and equipment expenses 560 539 1,667 1,615
Other expenses 2,494 1,294 5,297 3,895
-------------------------------------
Total other expenses 6,613 5,006 17,396 15,128
-------------------------------------
INCOME BEFORE INCOME TAX AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 2,325 1,855 6,001 5,106
Income tax 797 731 1,980 1,991
-------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,528 1,124 4,021 3,115
CUMULATIVE EFFECT ON YEARS PRIOR TO 2002
OF A CHANGE IN ACCOUNTING FOR GOODWILL (97)
-------------------------------------
NET INCOME $ 1,528 $1,124 $ 3,924 $ 3,115
=====================================
BASIC AND DILUTED EARNINGS PER SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .77 $ .57 $ 2.03 $ 1.57
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .05
-------------------------------------
BASIC AND DULUTED EARNINGS PER SHARE $ .77 $ .57 $ 1.98 $ 1.57
=====================================
See notes to consolidated financial statements.
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Table Dollar Amounts in Thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2002 $1,038 $20,808 $ 28,130 $ 430 $(15,463) $ 34,943
Net income $3,924 3,924 3,924
Other comprehensive income, net of tax,
unrealized gain on securities 2,732 2,732 2,732
------
Comprehensive income $6,656
======
Cash dividends ($.45 per share) (893) (893)
Purchase of 3,000 shares of
treasury stock (62) (62)
------------------- -----------------------------------------------
BALANCES, SEPTEMBER 30, 2002 $1,038 $20,808 $ 31,161 $3,162 $(15,525) $ 40,644
=================== ===============================================
See notes to consolidated financial statements.
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar Amounts in Thousands)
NINE MONTHS
ENDED SEPTEMBER 30
----------------------
2002 2001
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 3,924 $ 3,115
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 1,125 1,005
Depreciation and amortization 1,092 1,105
Goodwill impairment 874
Impairment of mortgage servicing rights 318
Deferred income tax 1,132 (396)
Investment securities amortization (accretion), net (21) 4
Gain on sale of loans (2,280) (1,639)
Proceeds from sales of loans 110,815 100,969
Loans originated for sale (107,632) (100,185)
Gain on sale of other real estate owned (142)
Deferred loan fees (5) (27)
Unearned income (154) (23)
Net change in:
Interest receivable (212) 422
Interest payable (3) 10
Other assets (1,112) (238)
Other liabilities 396 970
---------------------
Net cash provided by operating activities 8,115 5,092
---------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (5) (7)
Purchases of securities available for sale (68,549) (1,995)
Proceeds from maturities, calls, and principal
repayments of securities available for sale 25,949 25,964
Proceeds from sales of securities available for sale 315
Purchase of Federal Home Loan Bank and Federal
Reserve Bank stock (1,591) (1)
Net change in loans (37,134) (15,276)
Recoveries on loans previously charged-off 302 268
Purchases of premises and equipment (961) (352)
---------------------
Net cash provided (used) by investing activities (81,989) 8,916
---------------------
FINANCING ACTIVITIES
Net change in
Deposits 66,462 (7,602)
Short-term borrowings 90 (16,432)
Federal Home Loan Bank advances 141,848 140,000
Repayment of Federal Home Loan Bank advances (115,029) (135,027)
Proceeds from issuance of trust preferred securities 12,000
Dividends paid (893) (882)
Purchase of treasury stock (62) (47)
---------------------
Net cash provided (used) by financing activities 104,416 (19,990)
---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 30,542 (5,982)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,628 35,051
---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,170 $ 29,069
=====================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 13,374 $ 16,519
Income tax paid 2,910 2,456
See notes to consolidated financial statements.
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A.
(Bank), HBC Insurance Group, Inc. (Insurance Company) and Horizon Statutory
Trust I (Trust). All intercompany balances and transactions have been
eliminated. The results of operations for the periods ended September 30, 2002
and September 30, 2001 are not necessarily indicative of the operating results
for the full year of 2002 or 2001. The accompanying unaudited 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
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Horizon's Form
10-K annual report for 2001 filed with the Securities and Exchange Commission.
The consolidated balance sheet of Horizon as of December 31, 2001 has been
derived from the audited balance sheet of Horizon as of that date.
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. All share and per share amounts
have been adjusted to give effect to a three for one stock split declared on
October 16, 2001.
Horizon formed a wholly owned subsidiary in 2002, Horizon Statutory Trust I, for
the purpose of participating in a Pooled Trust Preferred Program. See Note 8 for
further discussion regarding this program.
NOTE 2 -- GOODWILL
In 2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.
SFAS 142 no longer permits amortization of goodwill and establishes a new method
of testing goodwill for impairment by using a fair-value based approach. Under
this statement goodwill is to be evaluated for possible impairment as of January
1, 2002, and periodically thereafter. Horizon adopted SFAS 142 on January 1,
2002. As required by this standard, an initial test for goodwill impairment was
performed which compared the fair value of Horizon's insurance agency (a
subsidiary of the Bank) to its carrying value. Market values for comparable
agencies, as well as other factors, were used as the basis for determining the
fair value of the insurance agency. As a result of this testing, Horizon
recorded an impairment loss on goodwill of $160 thousand ($97 thousand
after-tax) as a cumulative effect of change in accounting method in the first
quarter of 2002.
During the third quarter of 2002, it was determined that further impairment of
the goodwill related to the Bank's insurance agency existed. This was based on
offers received while attempting to market the commercial and group health and
life, lines of business of the insurance agency. Therefore, a second impairment
test was conducted and a further write down of goodwill related to the insurance
agency was taken as a charge to other expense of $714 thousand ($428 thousand
after tax). This reduced to zero the carrying value of goodwill related to the
insurance agency.
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Table Dollar Amounts in Thousands)
The changes in the carrying amount of goodwill for the three and nine months
ended September 30, 2002, were:
THREE MONTHS ENDED SEPTEMBER 30 2002
- --------------------------------------------------------------------------------
Balance, July 1, 2002 $ 872
Impairment loss (714)
-------
Balance, September 30, 2002 $ 158
=======
NINE MONTHS ENDED SEPTEMBER 30 2002
- --------------------------------------------------------------------------------
Balance, January 1, 2002 $ 1,032
Impairment loss (874)
-------
Balance, September 30, 2002 $ 158
=======
Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangibles, requires transitional disclosures regarding the change in
amortization and other treatment of goodwill and intangible assets for the three
and nine months ended September 30, 2001, as follows:
THREE MONTHS ENDED SEPTEMBER 30 2001
- --------------------------------------------------------------------------------
Reported net income $1,124
Add back: Goodwill amortization, net of tax 13
------
Adjusted net income $1,137
======
NINE MONTHS ENDED SEPTEMBER 30 2001
- --------------------------------------------------------------------------------
Reported net income $3,115
Add back: Goodwill amortization, net of tax 40
------
Adjusted net income $3,155
======
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Table Dollar Amounts in Thousands)
NOTE 3 - INVESTMENT SECURITIES
2002
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $ 6,649 $ 101 $ 6,750
State and municipal 35,502 2,495 37,997
Federal agency collateralized
mortgage obligations 22,986 853 23,839
Federal agency mortgage backed pools 44,114 1,438 $(25) 45,527
----------------------------------------
Total available for sale $109,251 $4,887 $(25) $114,113
========================================
2001
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $20,255 $ 123 $ (59) $20,319
State and Municipal 15,411 277 (378) 15,310
Federal agency collateralized
mortgage obligations 17,150 468 (26) 17,592
Federal agency mortgage backed pools 13,812 310 14,117
----------------------------------------
Total investment securities $66,628 $1,178 $ (468) $67,338
========================================
The amortized cost and fair value of securities available for sale at September
30, 2002, 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.
AVAILABLE FOR SALE
------------------------
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------------------------
Within one year $ 688 $ 688
One to five years 4,924 5,058
Five to ten years 2,354 2,386
After ten years 34,185 36,615
------------------------
42,151 44,747
Federal agency collateralized mortgage obligations 22,986 23,839
Federal agency mortgage backed pools 44,114 45,527
------------------------
$109,251 $114,113
========================
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Table Dollar Amounts in Thousands)
There were no sales of securities available for sale during the three months and
nine months ending September 30, 2002. Proceeds from sales of securities
available for sale during the three months and nine months ended September 30,
2001 were $315 thousand. There were no gross gains or losses realized on the
sales.
NOTE 4 - LOANS
SEPTEMBER 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Commercial loans $112,084 $100,912
Mortgage warehouse loans 230,240 205,511
Real estate loans 78,866 80,571
Installment loans 81,885 79,807
--------------------------
Total loans $503,075 $466,801
==========================
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of period $ 5,410 $ 4,803
Provision for losses, operations 1,125 1,505
Recoveries on loans 302 683
Loans charged off (1,019) (1,581)
-------------------------
Balances, end of period $ 5,818 $ 5,410
=========================
NOTE 6 - NONPERFORMING ASSETS
SEPTEMBER 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
Nonperforming loans $1,285 $1,900
Other real estate owned 105 538
-------------------------
Total nonperforming assets $1,390 $2,438
=========================
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Table Dollar Amounts in Thousands)
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN HORIZON BANCORP'S
SUBORDINATED DEBENTURES
In March of 2002, Horizon formed Horizon Statutory Trust I (Trust). The Trust is
a statutory business trust and is wholly owned by Horizon. The Trust issued $12
million of Trust Preferred Capital Securities as a participant in a pooled trust
preferred securities offering. Horizon issued junior subordinated debentures
aggregating $12 million to the Trust. The junior subordinated debentures are the
sole assets of the Trust. The junior subordinated debentures and the trust
preferred securities pay interest and dividends, respectively, on a quarterly
basis. The junior subordinated debentures and the securities bear interest at a
rate of 90 day LIBOR plus 3.60% and mature on March 26, 2032 and are noncallable
for five years. After that period, the securities may be called at any quarterly
interest payment date at par. The Trust Preferred Capital Securities, subject to
certain limitations, are included in Tier 1 Capital for regulatory purposes.
Dividends on the Trust Preferred Capital Securities are recorded as interest
expense. Costs associated with the issuance of the securities totaling $362
thousand were capitalized and are being amortized over the estimated life of the
securities.
NOTE 8 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In August, 2002, substantially all of the participants in Horizon's Stock Option
and Stock Appreciation Rights Plans voluntarily entered into an agreement with
Horizon to cap the value of their stock appreciation rights (SARS) at $22 per
share and cease any future vesting of the SARS. Under the Plans, participants
are given the choice of exercising either stock options or SARS. The exercise of
one SAR cancels a corresponding stock option, and vice versa. The agreement has
no effect on the participant's stock options. As a result of these agreements,
Horizon will not be required to recognize compensation expense related to the
SARS for any future increases in its stock price above $22 per share as there is
a presumption that participants will exercise stock options when the per share
price exceeds $22. Compensation expense related to the SARS for the nine months
ended September 30, 2002 and 2001 was $623 thousand and $219 thousand
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The purpose of this discussion is to focus on Horizon's financial condition and
its results of operations in order to provide a better understanding of the
consolidated financial statements included elsewhere herein. This discussion
should be read in conjunction with the consolidated financial statements and the
related notes.
FINANCIAL CONDITION
Liquidity
- ---------
The Bank maintains a stable base of core deposits provided by long standing
relationships with consumers and local businesses. These deposits are the
principal source of liquidity for Horizon. Other sources of liquidity for
Horizon include earnings, loan repayments, investment security sales and
maturities, sale of real estate loans and borrowing relationships with
correspondent banks, including the Federal Home Loan Bank (FHLB). During the
nine months ended September 30, 2002, cash and cash equivalents increased by
approximately $31 million. Another source of funds was the proceeds from the
issuance of junior subordinated debentures, which closed on the 26th of March.
In addition to liquidity provided from the normal operating, funding, and
investing activities of Horizon, at September 30, 2002, the Bank has available
approximately $77 million in unused credit lines with various money center banks
and the FHLB.
There have been no other material changes in the liquidity of Horizon from
December 31, 2001 to September 30, 2002.
Capital Resources
- -----------------
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at September 30, 2002. Stockholders' equity totaled
$40.644 million as of September 30, 2002 compared to $34.943 million as of
December 31, 2001. The change in stockholders' equity during the nine months
ended September 30, 2002 is the result of an increase in market value of
investment securities available for sale, net of tax, and net income, net of
dividends declared. At September 30, 2002, the ratio of stockholders' equity to
assets was 5.81% compared to 5.94% at December 31, 2001.
In April of 2002, Horizon registered 200,000 shares of stock for a newly adopted
dividend reinvestment and stock purchase plan that became available to Horizon's
shareholders in May, 2002. The purpose of the dividend reinvestment plan is to
provide participating shareholders with a simple and convenient method of
investing cash dividends paid by Horizon on its shares of common stock in
additional shares of common stock. In August of 2002, Horizon registered 269,400
shares of stock available for issuance under the 1987 Stock Option and Stock
Appreciation Rights Plan and the 1997 Key Employees' Stock Option and Stock
Appreciation Plan.
There have been no other material changes in Horizon's capital resources from
December 31, 2001 to September 30, 2002.
Material Changes in Financial Condition - September 30, 2002 compared to
- ------------------------------------------------------------------------
December 31, 2001
- -----------------
Because of the nature of its activities, Horizon is subject to pending and
threatened legal actions that arise in the normal course of business. In
management's opinion, none of the litigation to which Horizon or any of its
subsidiaries is a party will have a material effect on the consolidated
financial position or results of operations of Horizon.
During first nine months of 2002, investment securities increased approximately
$47 million. This growth relates directly to the additional regulatory Tier 1
capital raised through the issuance of $12 million of Trust Preferred
Securities. To cover the cost of this long-term debt, the Bank borrowed an
additional $40 million and invested the proceeds in additional investment
securities. The transactions will generate an initial net interest spread of
approximately 1.35%.
Loans increased by approximately $36 million for the nine months ended September
30, 2002. A decline in residential mortgage rates caused an increase in mortgage
loan refinance activity, which caused an increase in mortgage warehouse loans.
Commercial loan growth came as a result of new lenders bringing in new high
quality business customers and refinancing existing debt of those customers at
more favorable rates.
An allowance for loan losses is maintained to absorb 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 estimated losses inherent in the loan portfolio. Horizon's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans, and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments. Loss factors are based on a historical
loss experience and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The conditions evaluated in
connection with the unallocated allowance may include factors such as local,
regional, and national economic conditions and forecasts, and adequacy of loan
policies and internal controls, the experience of the lending staff, bank
regulatory examination results, and changes in the composition of the portfolio.
Horizon considers the allowance for loan losses of $5.818 million adequate to
cover losses inherent in the loan portfolio as of September 30, 2002. However,
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.
Deposits grew by approximately $66 million during the first nine months of 2002.
In anticipation of the growth in mortgage warehouse loans discussed above,
Horizon sought deposits through internet activity. Approximately $40 million of
short-term certificates of deposit were generated in this manner. Deposit growth
also came from additional public fund deposits. Horizon continues to monitor
funding sources to reduce the cost of funds and maintain adequate liquidity.
There have been no other material changes in the financial condition of Horizon
from December 31, 2001 to September 30, 2002.
RESULTS OF OPERATIONS
Material changes in results of operations - September 30, 2002 compared to
- --------------------------------------------------------------------------
September 30, 2001
- ------------------
During the nine months ended September 30, 2002, net income totaled $3.924
million or $1.98 per share compared to $3.115 million or $1.57 per share for the
same period in 2001. This is an increase of 26%.
Net interest income was $16.769 million for the nine months ended September 30,
2002 compared to $14.265 million for the same period of 2001 an increase of 18%.
The increase resulted from an increase in earning assets.
The provision for loan losses totaled $1.125 million for the nine months ended
September 30, 2002 compared to $1.005 million for the same period in 2001. The
allowance for loan losses to total loans is 1.16% at September 30, 2002 compared
to 1.15% at December 31, 2001.
Total noninterest income for the nine months ended September 30, 2002 was $7.753
million compared to $6.905 for the same period in 2001. Service charge income
increased due to a new overdraft privilege product, offered to certain qualified
deposit customers. Income from fiduciary activities declined due to a decline in
market value of assets under administration. Gain on sale of loans increased as
Horizon sold approximately $8.9 million of portfolio mortgage loans which
generated a gain of approximately $350 thousand. These were the lowest yielding
loans in the portfolio and were sold to reduce the interest rate risk related to
a long term fixed rate asset as well as to provide funding for the anticipated
increase in mortgage warehouse loans. Also in the third quarter, Horizon sold
it's portfolio of credit card loans which totaled approximately $3.8 million. A
gain of approximately $381 thousand was recognized on this sale.
Noninterest expense increased $2.268 million or 15.0% for the nine months ended
September 30, 2002 compared to the same period in 2001. The increase was caused
primarily by increased expense related to stock appreciation rights and the
goodwill impairment charges taken in the first and third quarters totaling $874
thousand. Also included in noninterest expense is a charge of $318 thousand to
establish a reserve for mortgage servicing rights impairment. This adjustment
was due to a decline in the valuation of Horizon's mortgage servicing rights
resulting from the low interest rate environment which caused a significant
increase in mortgage loan prepayments. The mortgage servicing rights asset
before reserves totals $925 thousand ($607 thousand, net of the reserve).
In August, 2002, substantially all of the participants in Horizon's Stock Option
and Stock Appreciation Rights Plans voluntarily entered into an agreement with
Horizon to cap the value of their stock appreciation rights (SARS) at $22 per
share and cease any future vesting of the SARS. Under the Plans, participants
are given the choice of exercising either stock options or SARS. The exercise of
one SAR cancels a corresponding stock option, and vice-versa. The agreement has
no effect on the participant's stock options. As a result of these agreements,
Horizon will not be required to recognize compensation expense related to the
SARS for any future increases in its stock price above $22 per share as there is
a presumption that participants will exercise stock options when the per share
price exceeds $22. Compensation expense related to the SARS for the nine months
ended September 30, 2002 and 2001 was $623 thousand and $219 thousand
respectively.
There have been no other material changes in the results of operations of
Horizon for nine months ending September 30, 2002 and 2001.
SUBSEQUENT EVENT
On October 18, 2002 Horizon announced the sale of its commercial and group
insurance lines to General Insurance Services effective November 1, 2002.
Horizon will continue to offer personal insurance lines, including life
insurance, annuities, homeowners and auto insurance with licensed insurance
representatives on staff at most Horizon offices. Proceeds from the sale are
contingent upon future commissions generated by renewals of existing insurance
policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon currently does not engage in any derivative or hedging activity. Refer
to Horizon's 2001 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 2001 Form 10-K.
Forward-Looking Statements
- --------------------------
Certain statements in this section constitute forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Horizon to differ materially from any future results,
performance, or achievements expressed or implied by such forward-looking
statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
- ------------------------------------------------
Based on an evaluation of disclosure controls and procedures within 90 days
prior to the filing of this report, 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-14(c)). 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 gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.
Changes In Internal Controls
- ----------------------------
Since the evaluation date, there have been no significant changes in Horizon's
internal controls or in other factors that could significantly affect such
controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not Applicable
ITEM 5. OTHER INFORMATION
- -------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) EXHIBITS
Exhibit 10.1. Form of Amendment No. 1 to Horizon Bancorp Stock
Option and Stock Appreciation Rights Agreement and Schedule
Identifying Material Details of Individual Amendments
Exhibit 11. Statement Regarding Computation of Per Share Earnings
Exhibit 99.1 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
(b) REPORTS ON FORM 8-K - 8-K filed August 23, 2002 concerning
agreement between Horizon and holders of Stock Appreciation
Rights.
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
11/11/02 /s/ Craig M. Dwight
- -------------------- -----------------------------------------
Date: BY: Craig M. Dwight
President and Chief Executive Officer
November 11, 2002 /s/ James H. Foglesong
- -------------------- -----------------------------------------
Date: BY: James H. Foglesong
Chief Financial Officer
CERTIFICATIONS
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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures 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
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 11/11/2002
----------------------
/s/ Craig M. Dwight
- -------------------------------------
Craig M. Dwight
President and Chief Executive Officer
CERTIFICATIONS
I, James H. Foglesong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Horizon Bancorp;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures 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
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
----------------------
/s/ James H. Foglesong
- ---------------------------
James H. Foglesong
Chief Financial Officer
INDEX TO EXHIBITS
The following documents are filed as Exhibits to this Report.
Exhibit
- -------
10.1 Form of Amendment No. 1 to Horizon Bancorp Stock Option and Stock
Appreciation Rights Agreement and Schedule Identifying Material
Details of Individual Amendments
11 Statement Regarding Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer 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.