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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by checkmark 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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant, based on the average bid price of such stock as
of June 30, 2002, the last day of the registrant's most recently completed
second fiscal quarter, was approximately $39,825,580.
As of March 24, 2003, the registrant had 1,982,700 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which
Document portion of document is incorporated
- -------- -----------------------------------
Portions of the Registrant's Proxy III
Statement to be filed for its May 8, 2003
annual meeting of shareholders
HORIZON BANCORP
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
Item_1. Business ..................................................... 3
Item_2. Properties ................................................... 11
Item_3. Legal Proceedings 11
Item_4. Submission of Matters to a Vote of Security Holders .......... 12
Special Item: Executive Officers of Registrant .......................... 12
PART II
Item_5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 12
Item_6. Selected Financial Data ...................................... 12
Item_7. Management's Discussion and Analysis of Financial Condition
and Results of Operation ..................................... 13
Item_7A. Quantitative and Qualitative Disclosures about Market Risk ... 28
Item_8. Financial Statements and Supplementary Data .................. 29
Item_9. Changes in and Disagreement with Accountants on Accounting
And Financial Disclosure ..................................... 62
PART III
Item_10. Directors and Executive Officers of the Registrant ........... 62
Item_11. Executive Compensation ....................................... 62
Item_12. Security Ownership of Certain Beneficial Owners and
Management ................................................... 62
Item_13. Certain Relationships and Related Transactions ............... 62
Item_14. Controls and Procedures ...................................... 62
PART IV
Item_15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ..................................................... 63
SIGNATURES ............................................................... 64
EXHIBIT INDEX ............................................................ 67
2
PART I
ITEM 1. BUSINESS
GENERAL
Horizon Bancorp ("Horizon") is a registered bank holding company organized under
the laws of the State of Indiana and headquartered in Michigan City, Indiana.
Horizon was organized and commenced operations as a bank holding company in
1983. Horizon owns all of the outstanding stock of Horizon Bank, N.A. (the
"Bank"). Horizon's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol HBNC.
Horizon is engaged in the business of commercial banking. Horizon's main source
of revenue is dividends paid to it by the Bank. The Bank was chartered as a
national bank association in 1873 and has operated continuously since that time.
The Bank has two wholly owned subsidiaries: Horizon Trust & Investment
Management, N.A. ("Horizon Trust") and Horizon Insurance Services, Inc.
("Horizon Insurance"). The Bank is a full-service commercial bank offering a
broad range of commercial and retail banking services, corporate and individual
trust and agency services, personal property and casualty insurance services and
other services incident to banking. The Bank maintains four facilities located
within La Porte County, Indiana, three facilities located in Porter County,
Indiana and a loan production office in Lake County, Indiana. At December 31,
2002, the Bank had total assets of $718,664,000 and total deposits of
$489,877,000. Aside from the stock of the Bank and Horizon Insurance Group,
Inc., Horizon's only other significant assets are cash and cash equivalents
totaling approximately $618,000, and deferred Federal and State income taxes of
approximately $633,000 at December 31, 2002.
Horizon has two nonbank subsidiaries, HBC Insurance Group, Inc. (the "Insurance
Company") and Horizon Statutory Trust 1 ("Horizon Trust"). The Insurance Company
offers credit life and accident and health insurance. The net income generated
from the Insurance Company is not significant to the overall operations of
Horizon. Horizon Trust is a statutory business trust that was formed in 2002 to
issue Trust Preferred Capital Securities. The business of Horizon, the Bank,
Horizon Trust, Horizon Insurance and Insurance Company 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 2002, revenues from loans
accounted for 74% of the total consolidated revenue. For the same year, revenues
from investment securities accounted for 12% of total consolidated revenue.
EMPLOYEES
The Bank, Horizon Trust and Horizon Insurance employed approximately 213 full
and part-time persons as of December 31, 2002. Horizon does 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 La Porte and Porter County,
Indiana, and Berrien County, Michigan. The Bank competes with commercial banks
located in the home county and contiguous counties in Indiana and Michigan, as
well as with savings and loan associations, consumer 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, 2002, the Bank was the largest of the 11 bank
and thrift institutions with offices in La Porte County with 30.8% of the
deposits and the fifth largest of the 13 institutions with offices in Porter
County with 5.2% of deposits (source: FDIC Summary of Deposits Market Share
Reports available at www3.fdic.gov/sod).
3
SUPERVISION AND REGULATION
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"). The Federal Reserve has issued regulations under the BHC
Act requiring a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. It is the policy of the Federal
Reserve that, pursuant to this requirement, a bank holding company should stand
ready to use its resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity.
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 nonbanking activities to those which are determined
by the Federal Reserve to be 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") have
adopted 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. The Bank exceeded the risk-based capital requirements of the FDIC
and OCC as of December 31, 2002. For Horizon's regulatory capital ratios and
regulatory requirements as of December 31, 2002, 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.
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. The Bank's deposits
are insured up to $100,000 per insured account by the Bank Insurance Fund, which
is administered by the FDIC.
Both federal and state law extensively regulates 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.
Horizon and the Bank are subject to the Federal Reserve Act, which restricts
financial transactions between banks and affiliated companies. The statute
limits credit transactions between banks, affiliated companies and its executive
officers and its affiliates. 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.
4
The FDICIA accomplished a number of sweeping changes in the regulation of
depository institutions and their holding companies. The FDICIA requires, among
other things, federal bank regulatory authorities to take "prompt corrective
action" with respect to banks that do not meet minimum capital requirements. The
FDICIA further directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value of publicly traded shares, and such other standards as the agency
deems appropriate.
The Riegle-Neal Community Development and Regulatory Improvement Act of 1994
contains seven titles pertaining to community development and home ownership
protection, small business capital formation, paperwork reduction and regulatory
improvement, money laundering, and flood insurance. The applicable federal
supervisory agencies continue to promulgate regulations implementing the
Riegle-Neal Community Development and Regulatory Improvement Act of 1994 that
apply to the Bank.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows
for interstate banking and interstate branching without regard to whether such
activity is permissible under state law. Bank holding companies may now acquire
banks anywhere in the United States subject to certain state restrictions.
On November 12, 1999, the President signed into law comprehensive legislation
that modernizes the financial services industry for the first time in decades.
The Gramm-Leach-Bliley Act ("GLBA") permits bank holding companies to conduct
essentially unlimited securities and insurance activities, in addition to other
activities determined by the Federal Reserve to be related to financial
services. As a result of the GLBA, Horizon may underwrite and sell securities
and insurance. It may acquire, or be acquired by, brokerage firms and insurance
underwriters. Horizon does not anticipate significant changes in its products or
services as a result of the GLBA.
In addition to the matters discussed above, Horizon's affiliate 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. The earnings of
financial institutions are also affected by general economic conditions and
prevailing interest rates, both domestic and foreign, and by the monetary and
fiscal policies of the United States government and its various agencies,
particularly the Federal Reserve.
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
affiliate bank in particular would be affected.
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 at December 31, 2002, 2001,
and 2000:
5
(in thousands) 2002 2001 2000
AVAILABLE FOR SALE COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
-------- ---------- ------- ---------- ------- ----------
U.S. Treasury and U.S. Government agencies and
corporations $ 5,979 $ 6,072 $20,255 $ 20,318 $26,171 $ 26,002
State and Municipal 35,504 37,115 15,411 15,310 5,564 5,696
Mortgage-backed securities 45,164 46,741 13,812 14,117 18,850 18,934
Collateralized mortgage obligations 18,697 19,525 17,150 17,593 20,458 20,502
Other securities 315 241
-------- ---------- ------- ---------- ------- ----------
Total investment securities $105,344 $ 109,453 $66,628 $ 67,338 $71,358 $ 71,375
======== ========== ======= ========== ======= ==========
b. The following is a schedule of maturities of each category of debt
securities and the related weighted average yield of such securities
as of December 31, 2002:
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
(Thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------- ----- ------- ----
AVAILABLE FOR SALE
U.S. Treasury and U.S. Government
agency securities (1) $1,000 4.25% $2,965 4.04% $ 2,014 3.20%
Obligations of states and political
subdivisions 39 4.50% 3,007 6.10% 2,309 6.56% $30,149 4.90%
Mortgage-backed securities (2) 293 4.80% 7,960 5.87% 10,444 5.95%
Collateralized mortgage obligations 759 6.19% 694 6.13% 20,979 5.36% 22,732 5.88%
------ ------ ------- -------
Total $1,798 5.07% $6,959 5.17% $33,262 5.44% $63,325 5.43%
====== ====== ======= =======
(1) Amortized cost is based on contractual maturity or call date
where a call option exists
(2) Maturity based upon 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 U.S.
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, 2002.
III. LOAN PORTFOLIO
a. Types of Loans - Total loans on the balance sheet are comprised of
the following classifications at December 31 for the years
indicated.
(Thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Commercial, financial, agricultural and
commercial tax-exempt loans $111,897 $100,912 $ 88,421 $ 89,361 $ 76,682
Mortgage warehouse loans 268,452 205,511 102,884 85,542
Real estate mortgage loans 73,910 80,571 125,431 154,717 152,390
Installment loans 81,534 79,807 76,842 64,737 61,274
-------- -------- -------- -------- --------
Total loans $535,793 $466,801 $393,578 $394,357 $290,346
======== ======== ======== ======== ========
6
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, 2002:
ONE THROUGH
Maturing or repricing (thousands) ONE YEAR OR LESS FIVE YEARS AFTER FIVE YEARS TOTAL
---------------- ----------- ---------------- --------
Commercial, financial, agricultural and $ 66,878 $ 30,817 $ 14,202 $111,897
commercial tax-exempt loans
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.)
(Thousands) FIXED RATE VARIABLE RATE
---------- -------------
Total commercial, financial, agricultural, and
commercial tax-exempt loans due after one year $28,081 $15,135
c. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following
schedule summarizes nonaccrual, past due, and restructured
loans.
December 31 (thousands) 2002 2001 2000 1999 1998
------ ------ ------ ------ ----
a. Loans accounted for on a nonaccrual basis $1,217 $1,772 $2,487 $1,173 $ 64
b. Accruing loans which are contractually
past due 90 days or more as to interest and
principal payments 76 128 699 401 830
c. Loans not included in (a) or (b) which
are "Troubled Debt Restructuring's" as
defined by SFAS No. 15
------ ------ ------ ------ ----
Totals $1,293 $1,900 $3,186 $1,574 $894
====== ====== ====== ====== ====
The decrease in nonaccrual loans in 2002 is primarily due to a
decrease in commercial loans of $868 thousand partially offset
by an increase in mortgage loans of $340 thousand. The
decrease in nonaccrual loans in 2001 is primarily due to a
decrease in nonaccrual mortgage loans of $637 thousand. The
increase in nonaccrual loans in 2000 is primarily due to the
increase in nonaccrual mortgage loans of $842 thousand and
increase in nonaccrual commercial loans of $321 thousand. The
increase in nonaccrual loans in 1999 is primarily due to the
addition of 4 mortgage loans totaling $375 thousand, 8
consumer loans totaling $252 thousand and 7 commercial loans
totaling $546 thousand.
7
III. LOAN PORTFOLIO (CONTINUED)
(Thousands)
Gross interest income that would have been recorded on
nonaccrual loans out standing as of December 31, 2002 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. $122
Interest income actually recorded on nonaccrual loans
outstanding as of December 31, 2002 and included in net
income for the period. 23
----
Interest income not recognized during the period on
nonaccrual loans outstanding as of December 31, 2002. $99
====
Discussion of Nonaccrual Policy
From time to time, the Bank obtains information, which may lead
management to believe that the collection of interest 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
nonaccruing loan. Further, it is management's policy to place a
commercial loan on a nonaccrual status when delinquent in excess of
90 days, unless the Loan Committee approves otherwise. The officer
responsible for the loan, the senior lending officer and the senior
collections officer must review all loans placed on nonaccrual
status. The senior collections officer monitors the loan portfolio
for any potential problem loans.
2. Potential Problem Loans
Impaired loans for which the discounted cash flows or collateral
value exceeded the carrying value of the loan totaled $162,741 and
$1,028,000 at December 31, 2002 and 2001, respectively. The
allowance for impaired loans, included in the Bank's allowance for
loan losses totaled $25,000 and $242,000 at those respective dates.
The average balance of impaired loans during 2002 and 2001 was
$585,490 and $1,168,000, respectively.
3. Foreign outstandings
None
4. Loan Concentrations
As of December 31, 2002, there are no significant concentrations of
loans exceeding 10% of total loans other than those disclosed in
Item III(a) above.
5. Other Interest-Bearing Assets
There are no other interest-bearing assets as of December 31, 2002,
which would be required to be disclosed under Item III C.1 or 2 if
such assets were loans.
8
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following is an analysis of the activity in the allowance for
loan losses account:
(Thousands) 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
LOANS
Loans outstanding at the end of the period (1) 529,538 466,801 393,578 394,357 290,346
Average loans outstanding during the period (1) 478,311 426,821 400,524 306,142 268,209
(1) Net of unearned income and deferred loan fees
ALLOWANCE FOR LOAN LOSSES 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Balance at beginning of the period $ 5,410 $ 4,803 $ 3,273 $ 2,787 $ 2,702
------- ------- ------- ------- -------
Loans charged-off:
Commercial and agricultural loans (244) (149) (71) (50) (39)
Real estate mortgage loans (112) (515) (3) (42) (2)
Installment loans (841) (917) (740) (1,135) (1,275)
------- ------- ------- ------- -------
Total loans charged-off (1,197) (1,581) (814) (1,227) (1,316)
------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Commercial and agricultural loans 90 115 66 82 3
Real estate mortgage loans 24 301 15 3
Installment loans 303 267 253 281 395
------- ------- ------- ------- -------
Total loan recoveries 417 683 334 363 401
------- ------- ------- ------- -------
Net loans (charged-off)/recovered (780) (898) (480) (864) (915)
Provision charged to operating expense 1,625 1,505 2,010 1,100 1,000
Provision charged to discontinued operations 250
------- ------- ------- ------- -------
Balance at the end of the period $ 6,255 $ 5,410 $ 4,803 $ 3,273 $ 2,787
======= ======= ======= ======= =======
Ratio of net (charge-offs)/recoveries to average
loans outstanding for the period (0.16)% (0.21)% (0.12)% (0.28)% (0.34)%
======= ======= ======= ======= =======
The provision for loan losses was increased in 2002 due to the
overall growth in total loans outstanding. The provision for loan
losses decreased in 2001 due to favorable experience in the mortgage
warehouse business. The provision for loan losses in 2000 increased
as a result of entering the mortgage warehousing business that
includes sub-prime mortgages. Management expects charge-offs in all
other portfolios to remain at the current levels.
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and the percentage of loans in each
category to total loans.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31 (THOUSANDS)
% of % of % of % of % of
Loans Loans Loans Loans Loans
to to to to to
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Commercial, financial $ 1,732 21% $ 1,678 22% $ 1,422 22% $ 819 23% $ 725 27%
and agricultural
Real estate mortgage 712 14% 641 17% 159 32% 149 39% 61 52%
Mortgage warehousing 1,574 50% 1,357 44% 1,628 26% 812 22%
Installment 2,007 15% 1,702 17% 1,270 20% 1,345 16% 1,800 21%
Unallocated 230 32 324 148 201
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total $ 6,255 100% $ 5,410 100% $ 4,803 100% $ 3,273 100% $ 2,787 100%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
9
In 1998, $277 thousand of the increase in the allowance allocated to
installment loans is related to loans originated at the Loan Store.
The majority of the assets of The Loan Store were sold in August
1999. The remaining increase in the allocation associated with
installment loans is related to the methodology adopted in 1996 in
which the higher of the Bank or the industry average charge-off rate
is utilized. The industry average historical rate was higher than
the Bank's historical charge-off rate in 1998 resulting in an
additional allocation to the installment loan portfolio of $160
thousand.
In 1999, Horizon began a mortgage warehousing program. This program
is described in Management's Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 below and in the Notes
to the Financial Statements in Item 8 below, which are incorporated
herein by reference. In 2002, Horizon continued to grow the mortgage
warehousing portfolio, and the allowance for loan losses associated
with this line of business was increased accordingly.
V. DEPOSITS
Information required by this section is found in Management's Discussion
and Analysis of Financial Condition and Results of Operation in Item 7
below and in the Consolidated Financial Statements and related notes in
Item 8 below, which are incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is found in Management's Discussion
and Analysis of Financial Condition and Results of Operation in Item 7
below and in the Consolidated Financial Statements and related notes in
Item 8 below, which are incorporated herein by reference.
VII. SHORT-TERM BORROWINGS
The following is a schedule of statistical information relative to
securities sold under agreements to repurchase which are secured by U.S.
Treasury and U.S. Government agency securities and mature within one year.
There were no other categories of short-term borrowings for which the
average balance outstanding during the period was 30 percent or more of
shareholders' equity at the end of the period.
December 31 (thousands) 2002 2001
------- -------
Outstanding at year end $22,259 $18,344
Approximate weighted average interest rate at year-end 0.88% 1.50%
Highest amount outstanding as of any month-end during the year $22,379 $18,358
Approximate average outstanding during the year $18,095 $16,495
Approximate weighted average interest during the year 1.23% 3.61%
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
A cautionary note about forward-looking statements: In its oral and written
statements, Horizon from time to time includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can include statements about estimated cost savings,
plans and objectives for future operations and expectations about Horizon's
financial and business performance as well as economic and market conditions.
They often can be identified by the use of words like "expect," "may," "could,"
"intend," "project," "estimate," "believe," or "anticipate."
10
Horizon may include forward-looking statements in filings with the Securities
and Exchange Commission ("SEC"), such as this Form 10-K, in other written
materials, and in oral statements made by senior management to analysts,
investors, representatives of the media, and others. It is intended that these
forward-looking statements speak only as of the date they are made, and Horizon
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the forward-looking statement is
made or to reflect the occurrence of unanticipated events.
By their nature, forward-looking statements are based on assumptions and are
subject to risks, uncertainties, and other factors. You are cautioned that
actual results may differ materially from those contained in the forward-looking
statement. The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 of this Form 10-K lists some of the
factors that could cause Horizon's actual results to vary materially from those
expressed in or implied by any forward-looking statements. Your attention is
directed to this discussion.
Other risks and uncertainties that could affect Horizon's future performance
include the effects of competition; technological changes; regulatory
developments; changes in fiscal, monetary and tax policies; market, economic,
operational, liquidity, credit and interest rate risks associated with Horizon's
business; inflation; competition in the financial services industry; changes in
general economic conditions, either nationally or regionally, resulting in,
among other things, credit quality deterioration; and changes in the securities
markets. Investors should consider these risks, uncertainties and other factors
in addition to those mentioned by Horizon in its other SEC filings from time to
time when considering any forward-looking statement.
ITEM 2. PROPERTIES
The main office of Horizon and the Bank is located at 515 Franklin Square,
Michigan City, Indiana. The building located adjacent to the main office of
Horizon and the Bank, at 502 Franklin Square, houses the credit administration,
operations and information technology departments of the Bank. In addition to
these principal facilities, the Bank has eight sales offices located at:
515 Franklin Square, Michigan City, Indiana
3631 South Franklin Street, Michigan City, Indiana
117 E. First St., Wanatah, Indiana
1410 Lincolnway, LaPorte, Indiana
423 South Roosevelt Street, Chesterton, Indiana
4208 N. Calumet, Valparaiso, Indiana
2650 Willowcreek Road, Portage, Indiana
2450 West Lincoln Highway, Merrillville, Indiana
Horizon owns all of the facilities, except for the Merrillville, Indiana office,
which it leases from a third party.
ITEM 3. LEGAL PROCEEDINGS
No material pending legal proceedings, other than ordinary routine
litigation incidental to the business to which Horizon or any of its
subsidiaries is a party or of which any of their property is subject.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Horizon's stockholders during the
fourth quarter of the 2002 fiscal year.
SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT
Robert C. Dabagia 64 Chairman of Horizon and the Bank since 1998; Chief
Executive Officer of Horizon and the Bank until July
1, 2001.
Craig M. Dwight 46 Chairman and Chief Executive Officer of the Bank since
January 2003; President and Chief Executive Officer of
Horizon and the Bank since July 1, 2001; President and
Chief Administrative Officer of Horizon and as the
President of the Bank since 1998; and Vice President
and Senior Lender, the Bank since 1997.
Thomas H. Edwards 50 President and Chief Operating Officer of the Bank
since January 2003; Executive Vice President and
Senior Lender, Horizon and the Bank since 1999,
Executive of Loan Management Services, Crowe, Chizek
and Company, LLP since 1993.
Lawrence J. Mazur 54 Chairman of Horizon Trust & Investment Management,
N.A. since January 2003; President, Horizon Trust &
Investment Management, N.A. since December 1998;
President, Financial Planning and Management
Corporation since 1994.
James H. Foglesong 57 Chief financial Officer, Horizon and the Bank since
January 2001; Executive Vice President and Chief
Financial Officer, Security Financial Bancorp since
1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information regarding Horizon's common stock is included under the caption
"Horizon's Common Stock and Related Stockholders' Matters" in Item 8 below,
which is incorporated by reference.
The Equity Compensation Plan Information included in Horizon's Definitive Proxy
Statement for the Annual Meeting to be held on May 8, 2003, is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is incorporated by reference to the
information appearing under the caption "Summary of Selected Financial Data" in
Item 8 of this Form 10-K.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(Table Dollar Amounts in Thousands)
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
Horizon maintains a high quality investment portfolio with low credit risk.
Investment securities totaled $109.453 million at December 31, 2002 and
consisted of U. S. Treasury and Government Agency securities of $6.072 million
(5.6)%; Municipal securities of $37.115 million (33.9)%; Mortgage-Backed
securities of $46.741 million (42.7)%; and collateralized mortgage obligations
of $19.525 million (17.8)%.
As indicated above, 60.5% of the investment portfolio consists of
mortgage-backed securities and collateralized mortgage obligations. These
instruments are secured by residential mortgages of varying maturities.
Principal and interest payments are received monthly as the underlying mortgages
are repaid. These payments also include prepayments of mortgage balances as
borrowers either sell their homes or refinance their mortgages. Therefore,
mortgage-backed securities and collateralized mortgage obligations have
maturities that are stated in terms of average life. The average life is the
average amount of time that each dollar of principal is expected to be
outstanding. As of December 31, 2002, the mortgage-backed securities and
collateralized mortgage obligations in the investment portfolio had an average
life of 3.19 years. Securities that have interest rates above current market
rates are purchased at a premium. These securities may experience a significant
increase in prepayments when lower market interest rates create an incentive for
the borrower to refinance the underlying mortgage. This may result in a decrease
of current income, however, this risk is mitigated by a shorter average life.
Management currently believes that prepayment risk on these securities is
nominal.
At December 31, 2002 and 2001, all investment securities were classified as
available for sale. Securities classified as available for sale are carried at
their fair value, with both unrealized gains and losses added or subtracted, net
of tax, directly to stockholders' equity. This accounting method adds potential
volatility to stockholders' equity, but net income is not affected unless
securities are sold. Net appreciation on these securities totaled $4.109
million, which resulted in a $2.671 million addition, net of tax, to
stockholders' equity at December 31, 2002. This compared to a $430 thousand, net
of tax, addition in stockholders' equity at December 31, 2001.
As a member of the Federal Reserve and Federal Home Loan Bank system, Horizon is
required to maintain an investment in the common stock of each entity. The
investment in common stock is based on a predetermined formula. At December 31,
2002, Horizon has investments in the common stock of the Federal Reserve and
Federal Home Loan Bank totaling $8.329 million compared to $6.738 million at
December 31, 2001.
At December 31, 2002, Horizon does not maintain a trading account and is not
using any derivative products for hedging or other purposes.
LOANS
Total loans, the principal earning asset of the Bank, were $535.793 million at
December 31, 2002. The current level of loans is an increase of 14.8% from the
December 31, 2001 level of $466.801 million.
13
As the table below indicates, the increase is related to the growth in mortgage
warehouse and commercial loans, and partially offset by a planned reduction of
mortgage loans during 2002.
DOLLAR PERCENT
DECEMBER 31 2002 2001 CHANGE CHANGE
--------- --------- ------- -------
Real estate loans
1 - 4 family $ 72,609 $ 77,641 $(5,032) (6.48)%
Multi-family 24 41 (17) (41.46)
Other 1,277 2,889 (1,612) (55.80)
--------- --------- ------- -------
Total 73,910 80,571 (6,661) (8.27)
--------- --------- ------- -------
Commercial loans
Working capital and equipment 64,940 60,260 4,680 7.77
Real estate, including agriculture 36,274 27,812 8,462 30.43
Tax exempt 5,814 6,584 (770) (11.70)
Other 4,869 6,256 (1,387) (22.17)
--------- --------- ------- -------
Total 111,897 100,912 10,985 10.89
--------- --------- ------- -------
Consumer loans
Auto 30,414 20,664 9,750 47.18
Recreation 1,931 2,362 (431) (18.25)
Real estate/home improvement 24,549 33,937 (9,388) (27.66)
Home equity 17,015 13,305 3,710 27.88
Credit cards 4,227 (4,227) (100.00)
Unsecured 1,929 1,189 740 62.24
Other 5,696 4,123 1,573 38.15
--------- --------- ------- -------
Total 81,534 79,807 1,727 2.16
--------- --------- ------- -------
Mortgage warehouse loans
Prime 176,212 152,760 23,452 15.35
Sub-Prime 92,240 52,751 39,489 74.86
Total 268,452 205,511 62,941 30.63
--------- --------- ------- -------
Grand total $ 535,793 $ 466,801 $68,992 14.78%
========= ========= ======= =======
The acceptance and management of credit risk is an integral part of the Bank's
business as a financial intermediary. The Bank has established rigorous
underwriting standards including a policy that monitors the lending function
through strict administrative and reporting requirements. The Bank uses an
independent third-party loan review function that regularly reviews asset
quality.
REAL ESTATE LOANS
Real estate loans totaled $73.910 million or 14% of total loans as of December
31, 2002, compared to $80.571 million or 17% of total loans as of December 31,
2001. This category consists of home mortgages that generally require a loan to
value of no more than 80%. Some special guaranteed or insured real estate loan
programs do permit a higher loan to collateral value ratio.
14
In addition to the customary real estate loans described above, the Bank also
has outstanding on December 31, 2002, $17.015 million in home equity lines of
credit compared to $13.305 million at December 31, 2001. Credit lines normally
limit the loan to collateral value to no more than 89%. These loans are
classified as consumer loans in the table above and in Note 3 of the
consolidated financial statements.
Residential real estate lending is a highly competitive business. As of December
31, 2002, the real estate loan portfolio reflected a wide range of interest
rates and repayment patterns, but could generally be categorized as follows:
2002 2001
----------------------------- -----------------------------
PERCENT OF PERCENT OF
AMOUNT PORTFOLIO YIELD AMOUNT PORTFOLIO YIELD
------- ---------- ----- ------- ---------- -----
Fixed rate
Monthly payment $18,030 24.39% 7.24% $37,425 46.45% 7.10%
Biweekly payment 6,739 9.12 7.31 10,772 13.37 7.53
Adjustable rate
Monthly payment 48,941 66.22 6.23 32,095 39.83 6.99
Biweekly payment 200 .27 5.52 279 .35 7.23
------- ---------- ------- ----------
Total $73,910 100.00% 6.57% $80,571 100.00% 7.11%
------- ---------- ------- ----------
During 2002, and 2001 approximately $177 million and $172 million respectively
of residential mortgages were originated for sale into the secondary market.
These loan sales , which are high when compared to years prior to 2001, also
caused a decrease in the Bank's portfolio of residential mortgage loans as a
portion of portfolio loans were refinanced and sold into the secondary market.
In addition to the real estate loan portfolio, the Bank sells real estate loans
and retains the servicing rights. Loans serviced for others are not included in
the consolidated balance sheets. The unpaid principal balances of loans serviced
for others totaled approximately $102,409,000 and 1,582 and $106,140,000 and
1,509 at December 31, 2002 and 2001.
The Bank began capitalizing mortgage servicing rights during 2000 and the
aggregate fair value of capitalized mortgage servicing rights at December 31,
2002 totaled approximately $532,000. Comparable market values and a valuation
model that calculates the present value of future cash flows were used to
estimate fair value. For purposes of measuring impairment, risk characteristics
including product type, investor type, and interest rates, were used to stratify
the originated mortgage servicing rights.
2002 2001
----- -----
Mortgage Servicing Rights
Balances, January 1 $ 892 $ 316
Servicing rights capitalized 340 688
Amortization of servicing rights (293) (112)
----- -----
939 892
Impairment allowance (407) 0
----- -----
Balances, December 31 $ 532 $ 892
===== =====
15
COMMERCIAL LOANS
Commercial loans totaled $111.9 million or 21% of total loans as of December 31,
2002, compared to $100.912 million or 22% as of December 31, 2001.
Commercial loans consisted of the following types of loans at December 31:
2002 2001
------------------------------ ------------------------------
PERCENT OF PERCENT OF
NUMBER AMOUNT PORTFOLIO NUMBER AMOUNT PORTFOLIO
------ -------- ---------- ------ -------- ----------
SBA guaranteed loans 26 $ 5,074 4.53% 23 $ 4,186 4.15%
Municipal government 30 5,814 5.20 36 6,584 6.52
Lines of credit 173 18,586 16.61 175 18,216 18.05
Real estate and equipment
term loans 262 82,423 73.66 277 71,926 71.28
------ -------- ---------- ------ -------- ----------
Total 491 $111,897 100.00% 511 $100,912 100.00%
====== ======== ========== ====== ======== ==========
CONSUMER LOANS
Consumer loans totaled $81.534 million or 15% of total loans as of December 31,
2002, compared to $79.807 million or 17% as of December 31, 2001. During 2002,
Horizon sold its portfolio of credit card loans, which totaled $3.767 million.
The total consumer loan portfolio increased 2.1% in 2002.
MORTGAGE WAREHOUSE LOANS
In November 1999, Horizon began a mortgage-warehousing program. Horizon enters
into agreements with mortgage companies and purchases, at its discretion,
mortgage loans from mortgage companies at par, net of certain fees, and later
sells them back to the mortgage companies at the same amount and without
recourse provisions. Interest income is recorded based upon a rate of interest
tied to the prime rate during the funding period, not the rates on the
individual note. Such loans are made to individuals and reviewed, prior to
purchase, for evidence that the loans are of secondary market quality and meet
Horizon's internal underwriting guidelines. An assignment of the mortgage to
Horizon is required. In addition, Horizon takes possession of the original note
and forwards such note to the end investor. In the event that the end investor
would not honor this commitment and the mortgage companies would not be able to
honor their repurchase obligations, Horizon would then need to sell these loans
in the secondary market at the fair value of these loans. Loans are typically
resold within 30 days and are seldom held more than 90 days.
ALLOWANCE AND PROVISION FOR LOAN LOSSES/CRITICAL ACCOUNTING POLICY
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. The identification
of loans that may have potential losses is subjective, therefore, a general
reserve is maintained to cover all potential losses within the entire loan
portfolio. Horizon utilizes a loan grading system that helps identify, monitor,
and address asset quality problems, in an adequate and timely manner. Each
quarter, various factors affecting the quality of the loan portfolio are
reviewed. Large credits are reviewed on an individual basis for loss potential.
Other loans are reviewed as a group based upon previous trends of loss
experience. Horizon also reviews the current and anticipated economic conditions
of its lending market to determine the effect they may have on the loss
experience of the loan portfolio. The methodology described above is consistent
with the Office of the Comptroller of the Currency's guidance in determining the
adequacy of the allowance for loan losses.
16
At December 31, 2002, the allowance for loan losses was $6.255 million or 1.17%
of total loans outstanding, compared to $5.410 million and 1.16% at December 31,
2001. During 2002, the provision for loan losses totaled $1.625 million compared
to $1.505 million in 2001. The allowance as a percent of total loans remained
fairly constant and somewhat below peers. Management is comfortable with this as
a majority of the portfolio is secured by residential mortgage loans that
historically have a lower risk than commercial and consumer loans. 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. Horizon considers the allowance for loan losses to be adequate to
cover losses inherent in the loan portfolio as of December 31, 2002
NONPERFORMING LOANS
Nonperforming loans are defined as loans that are greater than 90 days
delinquent or have had the accrual of interest discontinued by management.
Management continues to work diligently toward returning nonperforming loans to
an earning asset basis. Nonperforming loans for the previous three years ending
December 31 are as follows:
2002 2001 2000
------ ------ ------
Nonperforming loans $1,293 $1,900 $3,186
Nonperforming loans total 21% of the allowance for loan losses at December 31,
2002 compared to 35% and 66% of the allowance for loan losses on December 31,
2001 and 2000, respectively.
A loan becomes impaired when, based on current information, it is probable that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is classified as impaired,
the degree of impairment must be recognized by estimating future cash flows from
the debtor. The present value of these cash flows is computed at a discount rate
based on the interest rate contained in the loan agreement. However, if a
particular loan has a determinable market value, the creditor may use that
value. Also, if the loan is secured and considered collateral dependent, the
creditor may use the fair value of the collateral.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by 1 - 4 family
residences, residential construction loans, automobile, home equity, second
mortgage loans, and mortgage warehouse loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition indicate
that underlying cash flows of a borrower's business are not adequate to meet its
debt service requirements, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 30 days or more. Loans are
generally moved to nonaccrual status when 90 days or more past due. These loans
are often considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible.
Other real estate owned (OREO) net of any related allowance for OREO losses for
the previous three years ending December 31 are as follows:
2002 2001 2000
---- ---- ----
Other real estate owned $ 0 $538 $136
17
DEPOSITS
The primary source of funds for the Bank comes from the acceptance of demand and
time deposits. However, at times the Bank will use its ability to borrow funds
from the Federal Home Loan Bank when it can do so at interest rates and terms
that are superior to those required for deposited funds. Total deposits were
$489.259 million at December 31, 2002 compared to $419.599 million at December
31, 2001 or an increase of 16.6%. Below is a table of average deposits and rates
by category for the pervious three years ended December 31.
AVERAGE RATE
AVERAGE BALANCE OUTSTANDING PAID FOR THE YEAR
FOR THE YEAR ENDED DECEMBER 31 ENDED DECEMBER 31
------------------------------ --------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- ---- ---- ----
Noninterest-bearing demand deposits $ 47,603 $ 41,915 $ 40,254
Interest-bearing demand deposits 87,544 94,186 67,853 .81% 1.55% 3.29%
Savings deposits 33,051 32,591 35,509 .69 1.43 1.74
Money market 61,294 5,318 3,027 2.36 2.65 2.45
Time deposits 207,169 227,270 247,254 4.10 5.54 5.91
-------- -------- --------
Total deposits $436,661 $401,280 $393,897
======== ======== ========
Over the last three years Horizon revised and enhanced its interest-bearing
consumer and commercial demand deposit products and the money market account.
These product changes caused the increases in the average balances as displayed
in the table above.
Certificates of deposit of $100,000 or more, which are considered to be rate
sensitive and are not considered a part of core deposits, mature as follows as
of December 31, 2002:
Due in three months or less $35,482
Due after three months through six months 4,693
Due after six months through one year 5,593
Due after one year 28,967
-------
$74,735
Interest expense on time certificates of $100,000 or more was approximately
$1.231 million, $4.067 million, and $6.557 million for 2002, 2001, and 2000,
respectively.
SHAREHOLDER VALUE PLAN
During 2001, Horizon initiated a Shareholder Value Plan. The Plan is a
comprehensive strategic plan to broaden and improve the market for Horizon's
common stock with local community investors who have a long-term, personal
interest in helping Horizon remain an independent community bank. It includes
improved communications with shareholders and customers as well as efforts to
improve the marketability of its common stock. During the fourth quarter of
2001, two important components of the Shareholder Value Plan were completed.
These included a three for one stock split and the listing of Horizon's stock on
the NASDAQ SmallCap Market. Before this, Horizon's stock was traded on the
Bulletin Board. A dividend reinvestment plan was implemented in early 2002 and
the quarterly per share dividend was increased to $.16 in the fourth quarter of
2002.
RETIREMENT PLANS
On July 20, 1999, the Board of Directors of Horizon Bancorp authorized the
termination of the Horizon Bancorp Employee Stock Ownership Plan (ESOP). This
decision was based upon a thorough financial analysis of the impact this plan
has had on the earnings and capital of Horizon since its inception and the
expected future impact retaining this plan would likely have on Horizon. On
December 31, 1999,
18
the debt owed by the ESOP was repaid with the proceeds from
the sale of a portion of the unallocated shares to Horizon Bancorp. The
remaining shares for all active participants were allocated to participants. The
termination of the ESOP resulted in an expense of $2.073 million for 1999. The
remaining shares in the ESOP plan were transferred to the Stock Bonus Plan.
Prior to Horizon's stock being listed on NASDAQ SmallCap, the market value of
the shares held in Horizon's Stock Bonus Plan was classified outside of
shareholders' equity. Since the shares in the Stock Bonus Plan are now readily
tradeable, Horizon reclassified the Stock Bonus Plan equity to shareholders'
equity at December 31, 2001.
The retirement plans of Horizon own approximately 19% of the outstanding shares
at December 31, 2002.
CAPITAL RESOURCES
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at December 31, 2002. Stockholders' equity totaled
$41.410 million as of December 31, 2002 compared to $34.943 million as of
December 31, 2001. At year-end 2002, the ratio of stockholders' equity to assets
was 5.75% compared to 5.94% for 2001. Horizon's capital increased during the
year 2002 as a result of increased earnings, net of dividends declared, and the
increase in unrealized gain on securities available for sale, net of treasury
stock purchases. The growth in assets offset the growth in equity, causing a
slight decline in the equity to asset ratio from 2001 to 2002.
Horizon declared dividends in the amount of $.61 per share in 2002, and $.60 per
share in 2001 and 2000, adjusted for the three for one stock split declared in
2001. The dividend payout ratio (dividends as a percent of net income) was 22%
during 2002, 29% during 2001, and 32% in 2000. For additional information
regarding dividend conditions, see Note 1 of the Notes to the Consolidated
Financial Statements.
In March of 2002, Horizon formed Horizon Statutory Trust 1 (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 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
non-callable for five years and, 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. Distributions 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 to
the first call date of the securities.
The Bank purchases home mortgages from mortgage companies under warehouse
agreements whereby the mortgage company has the right to repurchase the loan.
Because these transactions are sales of the loans to the Bank and the Bank is
the owner of the purchased loans, the Bank has historically treated these loans
as home mortgage loans for call report and regulatory capital purposes. During
the course of the routine, periodic examination by bank regulatory authorities
commenced in February 2003, the examination personnel raised the issue of
whether the Bank's mortgage warehouse loans should be treated as other loans
rather than as home mortgage loans for call report purposes. If these mortgage
loans were treated as other loans, it would change the calculations for
risk-based capital and reduce the Bank's risk-based capital ratios. The
following table shows, for year-ends in 2001 and 2002, the amount of the Bank's
risk-based and Tier 1 capital ratios as reported and as they would be under this
alternative treatment:
19
HORIZON BANK
AND MINIMUM REQUIRED
HORIZON BANCORP ALTERNATIVE TO BE WELL
AS OF REPORTED TREATMENT CAPITALIZED
- ---------------------------------- -------- ----------- ----------------
December 31, 2002
Total capital (to risk-weighted
assets)
Consolidated 13.37% 10.30% N/A
Bank 13.55% 10.41% 10.00%
Tier 1 Capital (to risk-weighted
assets)
Consolidated 12.12% 9.17% N/A
Bank 12.29% 9.27% 6.00%
Tier 1 Capital (to average assets)
Consolidated 7.13% 7.13% N/A
Bank 7.20% 7.20% 5.00%
December 31, 2001
Total capital (to risk-weighted
assets)
Consolidated 10.41% 8.31% N/A
Bank 10.78% 8.57% 10.00%
Tier 1 Capital (to risk-weighted
assets)
Consolidated 9.17% 7.15% N/A
Bank 9.52% 7.41% 6.00%
Tier 1 Capital (to average assets)
Consolidated 5.86% 5.86% N/A
Bank 6.07% 6.07% 5.00%
If the Bank is required to reclassify such loans, the Bank still meets the
regulatory "well capitalized" standards for all of 2002. Management believes
these loans are properly characterized for risk-based capital purposes. However
there is no assurance that the regulators will concur with that determination.
If required to treat mortgage warehouse loans as commercial loans, the Bank will
consider increasing the amount of its capital through the issuance of
subordinated debt, trust preferred securities or equity securities; slow its
growth; or consider other alternatives.
As of December 31, 2002, management is not aware of any other recommendations by
banking regulatory authorities, which, if they were to be implemented, would
have or are reasonably likely to have a material effect on Horizon's liquidity,
capital resources, or operations.
RESULTS OF OPERATIONS
NET INCOME
Consolidated net income was $5.499 million or $2.75 per diluted share in 2002,
$4.125 million or $2.08 per share in 2001 and $3.783 thousand or $1.85 per share
in 2000. All per share information has been adjusted to reflect the three for
one stock split declared October 16, 2001.
NET INTEREST INCOME
The primary source of earnings for Horizon is net interest income. Net interest
income is the difference between what Horizon has earned on assets it has
invested and the interest paid on deposits and other funding sources. The net
interest margin is net interest income expressed as a percentage of average
20
earnings assets. Horizon's earning assets consist of loans, investment
securities, and interest-bearing balances in banks.
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
ASSETS
Interest-bearing assets
Loans - total (1) (3) $478,311 $ 35,168 7.35% $426,821 $ 36,304 8.51% $400,524 $ 36,883 9.21%
Taxable investment
securities, including FRB
and FHLB stock 82,154 4,629 5.63 65,598 4,085 6.23 73,203 4,871 6.65
Nontaxable investment
securities (2) 27,327 1,236 4.52 2,635 114 4.33 280 13 4.64
Interest-bearing balances
and money market
investments (4) 881 47 5.33 733 34 4.64 636 33 5.19
Federal funds sold 9,644 185 1.92 6,626 240 3.62 2,413 153 6.34
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 598,317 41,265 6.90 502,413 40,777 8.12 477,056 41,953 8.79
-------- -------- --------
Noninterest-earning assets
Cash and due from banks 20,731 19,051 15,739
Allowance for loan losses (5,708) (5,139) (4,048)
Other assets 24,900 25,184 26,032
-------- -------- --------
Total assets $638,240 $541,509 $514,779
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
Savings deposits $ 33,051 230 .69% $ 32,591 439 1.35 $ 35,509 779 2.19
Money market 61,294 1,444 2.36 5,318 141 2.65 3,027 74 2.45
Interest-bearing demand
deposits 87,544 709 .81 94,186 2,201 2.34 67,853 2,231 3.29
Time deposits 207,169 8,483 4.10 227,270 12,598 5.54 247,254 14,605 5.91
Short-term borrowings 22,915 353 1.54 23,061 925 4.01 10,996 612 5.57
Long-term debt 134,809 6,893 5.11 78,608 4,666 5.94 75,168 4,998 6.65
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 546,782 18,112 3.31 461,034 20,970 4.55 439,807 23,299 5.30
-------- -------- --------
Noninterest-bearing liabilities
Demand deposits 47,603 41,915 40,254
Other liabilities 5,169 4,487 4,236
Stockholders' equity 38,686 34,073 30,482
-------- -------- --------
Total liabilities and
stockholders' equity $638,240 $541,509 $514,779
======== ======== ========
Net interest income $ 23,153 $ 19,807 $ 18,654
======== ======== ========
Net interest income as a percent
of interest earning assets 3.87% 3.94% 3.91%
==== ==== ====
(1) Nonaccruing loans for the purpose of the computations above are included
in the daily average loan amounts outstanding. Loan totals are shown net
of unearned income and deferred loans fees.
(2) Yields are not presented on a tax-equivalent basis.
(3) Loan fees and late fees included in interest on loans aggregated
$2,654,000, $2,820,000, and $1,852,000 in 2002, 2001, and 2000,
respectively.
(4) Horizon has no foreign office and, accordingly, no assets or liabilities
to foreign operations. Horizon's subsidiary bank had no funds invested in
Eurodollar Certificates of Deposit at December 31, 2002.
21
2002 - 2001 2001 - 2000
INCREASE/(DECREASE) INCREASE/(DECREASE)
-------------------------------------- --------------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
---------- ---------- ---------- ---------- ---------- ----------
INTEREST INCOME
Loans - total $ (1,136) $ 4,100 $ (5,236) $ (579) $ 2,336 $ (2,915)
Taxable investment securities 544 960 (416) (786) (486) (300)
Nontaxable investment securities 1,122 1,117 5 101 102 (1)
Interest-bearing balances and money market
investments 13 13 1 1
Federal funds sold (55) 84 (139) 87 175 (88)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 488 6,274 (5,786) (1,176) 2,127 (3,303)
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings deposits (209) 6 (215) (340) (60) (280)
Money market 1,303 1,320 (17) 67 60 7
Interest-bearing demand deposits (1,492) (145) (1,347) (30) 722 (752)
Time deposits (4,115) (1,041) (3,074) (2,007) (1,139) (868)
Short-term borrowings (572) (101) (471) 313 598 (285)
Long-term debt 2,227 2,949 (722) (332) 221 (553)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense (2,858) 2,988 (5,846) (2,329) 402 (2,731)
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST EARNINGS $ 3,346 $ 3,286 $ 60 $ 1,153 $ 1,725 $ (572)
========== ========== ========== ========== ========== ==========
Horizon's average earning assets were $598.317 million in 2002 compared to
$502.413 million in 2001 and $477.056 million in 2000. The net interest margin
for 2002 was 3.87% compared to 3.94% and 3.91% in 2001 and 2000, respectively.
The year 2002 saw a stable rate environment after unprecedented declines in
interest rates in 2001. Horizon continued to lower its deposit rates and funded
the growth in rate sensitive assets with short-term borrowings to maintain its
net interest margin. The increase in net interest income during 2002 is
primarily the result of increased loan volume, particularly in the mortgage
warehouse division where growth came as a result of the low mortgage rate
environment. The low interest rates spurred a significant amount of mortgage
refinancing. The increase in net interest income from 2000 to 2001 is primarily
a result of increased volume in the loan portfolios.
NONINTEREST INCOME
The major components of noninterest income consist of service charges on deposit
accounts, gain on sale of loans and fiduciary fees. Service charges on deposit
accounts are based upon: a) recovery of direct operating expenses associated
with providing the service, b) allowing for a profit margin that provides an
adequate return on assets and stockholders' equity, and c) competitive factors
within the Bank's markets. Service charges on deposits were $2.948 million,
$2.362 million and $2.028 million, for 2002, 2001 and 2000, respectively. The
increase in service charges in 2002 is the result of a new overdraft protection
product, offered to certain qualified deposit customers.
Gain on sale of loans was $3.152 million for 2002 compared to $2.366 million in
2001 and $268 thousand for 2000. The 2002 amount includes approximately $357
thousand gain on the sale of portfolio loans while the 2001 amount includes
approximately $184 thousand gain on the sale of portfolio loans. The 2002 amount
also includes approximately $381 thousand of gain on the sale of credit card
loans. Portfolio loans were sold to reduce the interest rate risk related to
long term fixed rate assets and to provide funding for the growth in other loan
areas. The credit card loans were sold
22
to reduce the credit risk, eliminate the
inefficiencies related to managing a small portfolio and to provide funding for
other loan categories.
Fiduciary fees were $2.348 million in 2002 compared to $2.640 million in 2001
and $2.728 million in 2000. Fees declined primarily due to the decline in market
value of assets under administration.
NONINTEREST EXPENSE
Noninterest expense totaled $23.403 million in 2002 compared to $21.106 million
in 2001 and $17.905 million in 2000.
Salaries and benefits increased 8.1% during 2002 compared to an increase of
29.5% during 2001. The increase for 2002 was caused primarily by increases in
incentive compensation and commissions paid to mortgage originators. The
increase for 2001 related primarily to two factors: 1) Commission expense paid
to mortgage loan originators increased by $840 thousand due to the increase in
volume of mortgage loans originated; 2) Expense related to vested stock
appreciation rights outstanding increased $1.219 million due to the 144%
increase in Horizon's stock price.
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 increase 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 2002 and 2001
was $623 thousand and $1.013 million respectively.
Total other expenses, excluding salaries and benefits, increased 14.5% in 2002
and 5.86% in 2001. The primary factors causing the increase in 2002 were: 1)
approximately $200 thousand for processing services related to the new overdraft
protection product; 2) $714 thousand write off of goodwill related to Horizon's
insurance agency. Horizon adopted SFAS 142 on January 1, 2002. An initial test
for goodwill impairment was performed which compared the fair value of the
Insurance Agency to its carrying value. Market values for comparable agencies,
as well as other factors, were used as a 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 principle in the first quarter of
2002. During the third quarter of 2002, it was determined that further
impairment of the goodwill related to the 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.
This reduced to zero the carrying value of goodwill related to the Insurance
Agency. The remaining goodwill relates to Horizon Trust and Investment
Management.
The primary factors causing the increase in 2001 were; 1) $205 thousand increase
in legal expense related to the Shareholder Value Plan and issues involving
employee benefit plans; 2) $281 thousand increase in loan expense related to the
increased loan volume.
INCOME TAXES
Income tax expense, before cumulative effect of change in accounting for
goodwill, totaled $2.778 million in 2002, $2.592 million in 2001 and $1.812
million in 2000. The effective tax rate was 33.17%, 38.59%, and 32.39% for 2002,
2001, and 2000, respectively. The effective tax rate declined in 2002 due to
increased tax exempt investment income.
23
LIQUIDITY AND RATE SENSITIVITY MANAGEMENT
Management and the Board of Directors meet regularly to review both the
liquidity and rate sensitivity position of Horizon. Effective asset and
liability management ensures Horizon's ability to monitor the cash flow
requirements of depositors along with the demands of borrowers and to measure
and manage interest rate risk. Horizon utilizes an interest rate risk assessment
model designed to highlight sources of existing interest rate risk and consider
the effect of these risks on strategic planning. Management maintains an
essentially balanced ratio of interest sensitive assets to liabilities in order
to protect against the effects of wide interest rate fluctuations.
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). At December
31, 2002, Horizon has available approximately $79 million in available credit
from various money center banks, including the FHLB. During 2002, cash flows
were generated primarily from an increase in deposits of $69.7 million, increase
in borrowings from the FHLB of $41.8 million and issuance of trust preferred
securities of $12.0 million. Cash flows were used for a $69.0 million increase
in loans and a $42.1 million increase in investment securities. The net cash and
cash equivalent position increased by $17.1 million during 2002.
INTEREST SENSITIVITY
The degree by which net interest income may fluctuate due to changes in interest
rates is monitored by Horizon using computer simulation models, incorporating
not only the current GAP position but the effect of expected repricing of
specific financial assets and liabilities. When repricing opportunities are not
properly aligned, net interest income may be affected when interest rates
change. Forecasting results of the possible outcomes determines the exposure to
interest rate risk inherent in Horizon's balance sheet. The goal is to manage
imbalanced positions that arise when the total amount of assets that reprice or
maturing in a given time period differs significantly from liabilities that
reprice or mature in the same time period. The theory behind managing the
difference between repricing assets and liabilities is to have more assets
repricing in a rising rate environment and more liabilities repricing in a
declining rate environment. At December 31, 2002, the amount of assets that
reprice within one year were approximately 157% of the amount of liabilities
that reprice within the same time period. This compares to 150% at December 31,
2001.
24
RATE SENSITIVITY
-----------------------------------------------------------------------
3 MONTHS OR > 3 MONTHS > 6 MONTHS GREATER THAN
LESS AND < 6 MONTHS AND < 1 YEAR 1 YEAR TOTAL
----------- -------------- ------------ ------------ --------
Loans $ 353,455 $ 29,771 $ 47,828 $ 117,359 $548,413
Federal funds sold 12,000 12,000
Money market investments 121 121
Interest-bearing balances with Banks 200 200
Investment securities and FRB and FHLB stock 18,668 3,213 6,666 85,126 113,673
Other assets 45,723 45,723
----------- -------------- ------------ ------------ --------
Total assets $ 384,444 $ 32,984 $ 54,494 $ 248,208 $720,130
=========== ============== ============ ============ ========
Noninterest-bearing deposits $ 4,231 $ 4,231 $ 8,463 $ 34,209 $ 51,134
Interest-bearing deposits 85,568 54,193 59,749 238,615 438,125
Borrowed funds 51,990 21,426 10,154 99,951 183,521
Other liabilities 5,940 5,940
Stockholders' equity 41,410 41,410
----------- -------------- ------------ ------------ --------
Total liabilities and stockholders' equity $ 141,789 $ 79,850 $ 78,366 $ 420,125 $720,130
=========== ============== ============ ============ ========
GAP $ 242,655 $ (46,866) $ (23,872) $ (171,917)
Cumulative GAP $ 242,655 $ 195,789 $ 171,917
Included in the GAP analysis are certain interest-bearing demand accounts and
savings accounts. These interest-bearing accounts are subject to immediate
withdrawal. However, Horizon considers approximately 50% of these deposits to be
insensitive to gradual changes in interest rates and generally to behave like
deposits with longer maturities based upon historical experience.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon's primary market risk exposure is interest rate risk. Interest rate risk
(IRR) is the risk that Horizon's earnings and capital will be adversely affected
by changes in interest rates. The primary approach to IRR management is one that
focuses on adjustments to the asset/liability mix in order to limit the
magnitude of IRR.
Horizon's exposure to interest rate risk is due to repricing or mismatch risk,
embedded options risk, and yield curve risk. Repricing risk is the risk of
adverse consequence from a change in interest rates that arise because of
differences in the timing of when those interest rate changes affect Horizon's
assets and liabilities. Basis risk is the risk that the spread, or rate
difference, between instruments of similar maturities will change. Options risk
arises whenever products give the customer the right, but not the obligation, to
alter the quantity or timing of cash flows. Yield curve risk is the risk that
changes in prevailing interest rates will affect instruments of different
maturities by different amounts. Horizon's objective is to remain reasonably
neutral with respect to IRR. Horizon utilizes a variety of strategies to
maintain this position including the sale of mortgage loans on the secondary
market and varying maturities of FHLB advances, certificates of deposit funding,
and investment securities.
25
The table, which follows, provides information about Horizon's financial
instruments that are sensitive to changes in interest rates as of December 31,
2002. The table incorporates Horizon's internal system generated data related to
the maturity and repayment/withdrawal of interest-earning assets and
interest-bearing liabilities. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted average interest rates by contractual maturities as well as the
historical experience of Horizon related to the impact of interest rate
fluctuations on the prepayment of residential loans and mortgage-backed
securities. From a risk management perspective, Horizon believes that repricing
dates are more relevant than contractual maturity dates when analyzing the value
of financial instruments. For deposits with no contractual maturity dates, the
table presents principal cash flows and weighted average rate, as applicable,
based upon Horizon's experience and management's judgment concerning the most
likely withdrawal behaviors.
Horizon had no derivative financial instruments or trading portfolio as of
December 31, 2002.
26
QUANTITATIVE DISCLOSURE OF MARKET RISK
2008 AND FAIR VALUE
2003 2004 2005 2006 2007 BEYOND TOTAL 12/31/02
-------- -------- -------- -------- -------- -------- -------- ----------
RATE-SENSITIVE ASSETS
Fixed interest rate loans $ 55,005 $ 28,008 $ 22,071 $ 15,790 $ 8,913 $ 27,877 $157,664 $ 163,854
Average interest rate 7.42% 7.81% 7.72% 7.59% 7.42% 7.29% 7.48%
Variable interest rate loans 376,047 3,324 1,644 950 2,262 6,522 390,749 398,456
Average interest rate 5.74% 6.72% 6.78% 6.849% 6.36% 6.95% 5.78%
Total loans 431,052 31,332 23,715 16,740 11,175 34,399 548,413 562,310
Average interest rate 5.95% 7.69% 7.65% 7.55% 7.21% 7.22% 6.27%
Securities, including FRB and
FHLB stock 28,547 9,918 8,718 6,705 8,180 55,714 117,782 117,782
Average interest rate 5.21% 5.78% 5.92% 5.59% 5.74% 5.40% 5.46%
Other interest-bearing assets 12,321 12,321 12,316
Average interest rate 1.27% 1.27%
Total earnings assets 471,920 41,250 32,433 23,445 19,355 90,113 678,516 692,408
Average interest rate 5.78% 7.23% 7.18% 6.99% 6.59% 6.12% 6.04%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing deposits $ 16,925 $ 10,386 $ 7,233 $ 5,037 $ 3,508 $ 8,045 $ 51,134 $ 51,134
NOW accounts 44,261 13,924 10,054 7,259 5,242 13,616 94,356 89,107
Average interest rate .62% .25% .25% .25% .25% .25% .43%
Savings and money market
accounts 58,733 25,860 17,493 3,270 2,306 5,418 113,080 109,963
Average interest rate 1.48% 1.37% 1.36% .35% .35% .35% 1.32%
Certificates of deposit 96,517 56,593 23,146 866 53,567 230,689 257,330
Average interest rate 2.87% 4.35% 3.75% 4.26% 4.80% 3.77%
Total deposits 216,436 106,763 57,926 16,432 64,623 27,079 489,259 507,534
Average interest rate 1.81% 2.67% 1.95% .40% 4.01% .20% 2.17%
Fixed interest rate borrowings 47,160 47,968 18,234 17,711 15,193 846 147,112 151,960
Average interest rate 3.74% 5.27% 4.73% 5.04% 4.29% 4.95% 4.58%
Variable interest rate
borrowings 36,409 36,409 36,441
Average interest rate 2.40% 2.40%
Total funds 300,005 154,731 76,160 34,143 79,816 27,925 672,780 695,935
Average interest rate 2.91% 3.48% 2.62% 2.81% 4.34% .69% 2.71%
NEW ACCOUNTING PRONOUNCEMENTS
In October 2002, FASB issued SFAS No. 147 ACQUISITIONS OF CERTAIN FINANCIAL
INSTITUTIONS, which amends SFAS No. No. 72, ACCOUNTING FOR CERTAIN ACQUISITIONS
OF BANKING OR THRIFT INSTITUTIONS, and FASB Interpretation No. 9, APPLYING APB
OPINIONS NO. 16 AND 17 WHEN A SAVINGS AND LOAN ASSOCIATION OR A SIMILAR
INSTITUTION IS ACQUIRED IN A BUSINESS COMBINATION ACCOUNTED FOR BY THE PURCHASE
METHOD. Except for transactions between two or more mutual enterprises, SFAS No.
147
27
removes acquisitions of financial institutions from the scope of both SFAS
No. 72 and Interpretation No. 9 and requires that those transactions be
accounted in accordance with SFAS No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. In addition, SFAS No. 147 amends SFAS No.
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, to include
in its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. Those intangible assets are subject to the
same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used.
The effective date of SFAS No. 147 was October 1, 2002, with earlier application
relating to previously recognized unidentifiable intangible assets permitted.
The statement's adoption did not have an impact of the Company's financial
position or results of operations.
The Financial Accounting Standards Board (FASB) has issued Statement of
Accounting Standards (SFAS) No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--
TRANSITION AND DISCLOSURE, which amends FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 requires that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No 148 requires that this information be included in interim as well as
annual financial statements.
The annual disclosure provisions of SFAS No. 148 are now effective for Horizon
and are included in the financial statements. Horizon will continue to apply APB
No. 25 in accounting for its option plans. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning in 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this item is incorporated by reference to the
information appearing in Management's Discussion and Analysis of Financial
Condition and Results of Operation included in Item 7.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HORIZON BANCORP
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE(S)
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 30
Statements of Income 31
Statements of Stockholders' Equity 32
Statements of Cash Flows 33-34
Notes to Financial Statements 35-56
INDEPENDENT ACCOUNTANTS' REPORT 57
OTHER INFORMATION
Management's Report on Financial Statements 58
Summary of Selected Financial Data 59-60
Horizon's Common Stock and Related Stockholders' Matters 61
29
HORIZON BANCORP
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
DECEMBER 31 2002 2001
-------- --------
ASSETS
Cash and due from banks $ 23,568 $ 18,608
Interest-bearing demand deposits 124 20
Federal funds sold 12,000
-------- --------
Cash and cash equivalents 35,692 18,628
Interest-bearing deposits 321 247
Investment securities available for sale 109,453 67,338
Loans held for sale 12,620 6,816
Loans, net of allowance for loan losses of $6,255 and $5,410 529,538 461,391
Premises and equipment 15,794 16,197
Federal Reserve and Federal Home Loan Bank stock 8,329 6,738
Interest receivable 3,510 3,209
Other assets 4,873 7,381
-------- --------
Total assets $720,130 $587,945
======== ========
LIABILITIES
Deposits
Noninterest bearing $ 51,134 $ 43,353
Interest bearing 438,125 376,246
-------- --------
Total deposits 489,259 419,599
Short-term borrowings 24,409 22,344
Federal Home Loan Bank advances 147,112 105,293
Guaranteed preferred beneficial interests in Horizon Bancorp's subordinated
debentures 12,000
Interest payable 857 765
Other liabilities 5,083 5,001
-------- --------
Total liabilities 678,720 553,002
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.33 1/3 stated value
Authorized,15,000,000 shares
Issued, 3,115,284 shares 1,038 1,038
Additional paid-in capital 20,808 20,808
Retained earnings 32,418 28,130
Accumulated other comprehensive income 2,671 430
Treasury stock, at cost, 1,132,587 and 1,129,587 shares (15,525) (15,463)
-------- --------
Total stockholders' equity 41,410 34,943
-------- --------
Total liabilities and stockholders' equity $720,130 $587,945
======== ========
See notes to consolidated financial statements.
30
HORIZON BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31 2002 2001 2000
------ ------ ------
INTEREST INCOME
Loans receivable $35,168 $36,304 $36,883
Investment securities
Taxable 4,861 4,359 5,057
Tax exempt 1,236 114 13
------ ------ ------
Total interest income 41,265 40,777 41,953
------ ------ ------
INTEREST EXPENSE
Deposits 11,089 15,975 17,689
Federal funds purchased and short-term borrowings 650 329 612
Federal Home Loan Bank advances 5,855 4,666 4,998
Subordinated debentures 518
------ ------ ------
Total interest expense 18,112 20,970 23,299
------ ------ ------
NET INTEREST INCOME 23,153 19,807 18,654
Provision for loan losses 1,625 1,505 2,010
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,528 18,302 16,644
------ ------ ------
OTHER INCOME
Service charges on deposit accounts 2,948 2,362 2,028
Wire transfer fee income 757 557 479
Fiduciary activities 2,348 2,640 2,728
Commission income from insurance agency 653 849 812
Gain on sale of loans 3,152 2,366 268
Gain on sale of securities 2
Other income 391 745 541
------ ------ ------
Total other income 10,249 9,521 6,856
------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 12,752 11,801 9,115
Net occupancy expenses 1,652 1,725 1,733
Data processing and equipment expenses 2,177 2,177 2,077
Other expenses 6,822 5,403 4,980
------ ------ ------
Total other expenses 23,403 21,106 17,905
------ ------ ------
INCOME BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR GOODWILL 8,374 6,717 5,595
Income tax expense 2,778 2,592 1,812
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR GOODWILL 5,596 4,125 3,783
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR GOODWILL (NET OF
INCOME TAXES OF $63) 97
------ ------ ------
NET INCOME $5,499 $4,125 $3,783
====== ====== ======
BASIC EARNINGS PER SHARE
Before Cumulative Effect of a change in accounting for goodwill $ 2.82 $ 2.08 $ 1.85
Cumulative effect of a change in accounting for goodwill (.05)
------ ------ ------
$ 2.77 $ 2.08 $ 1.85
====== ====== ======
DILUTED EARNINGS PER SHARE
Before Cumulative Effect of a change in accounting for goodwill $ 2.80 $ 2.08 $ 1.85
Cumulative effect of a change in accounting for goodwill (.05)
------ ------ ------
$ 2.75 $ 2.08 $ 1.85
====== ====== ======
See notes to consolidated financial statements.
31
HORIZON BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME (LOSS) STOCK TOTAL
------ ---------- ------------- -------- ------------- -------- -------
BALANCES, JANUARY 1, 2000 $ 873 $ 13,153 $ $ 22,629 $ (1,201) $(14,263) $21,191
Net income $ 3,783 3,783 3,783
Other comprehensive income, net
of tax, unrealized gains on
securities 1,210 1,210 1,210
-------------
Comprehensive income $ 4,993
=============
Cash dividends ($.60 per share) (1,228) (1,228)
Purchase of 80,199 shares of
treasury stock (1,200) (1,200)
Re-issuance of 4,428 shares of
common stock in partial
payment of directors fees 12 48 60
Net purchases and distributions
with Stock Bonus Plan 34 1,098 1,132
------ ---------- -------- ------------- -------- -------
BALANCES, DECEMBER 31, 2000 907 14,263 25,184 9 (15,415) 24,948
Net income $ 4,125 4,125 4,125
Other comprehensive income, net
of tax, unrealized gains on
securities 421 421 421
-------------
Comprehensive income $ 4,546
=============
Cash dividends ($.60 per share) (1,179) (1,179)
Purchase of 2,937 shares of
treasury stock (48) (48)
Transfer of Stock Bonus Plan
shares to equity 131 6,545 6,676
------ ---------- -------- ------------- -------- -------
BALANCES, DECEMBER 31, 2001 1,038 20,808 28,130 430 (15,463) 34,943
Net income $ 5,499 5,499 5,499
Other comprehensive income, net
of tax, unrealized gains on
securities 2,241 2,241 2,241
-------------
Comprehensive income $ 7,740
=============
Cash dividends ($.61 per share) (1,211) (1,211)
Purchase of 3,000 shares of
treasury stock (62) (62)
------ ---------- -------- ------------- -------- -------
BALANCES, DECEMBER 31, 2002 $1,038 $20,808 $32,418 $2,671 $(15,525) $41,410
====== ========== ======== ============= ======== =======
See notes to consolidated financial statements.
32
HORIZON BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 5,499 $ 4,125 $ 3,783
Items not requiring (providing) cash
Provision for loan losses 1,625 1,505 2,010
Depreciation and amortization 1,444 1,476 1,445
Goodwill impairment 874
Impairment of mortgage servicing rights 407
Deferred income tax (703) (808) (157)
Gain on sale of loans (3,152) (2,366) (268)
Proceeds from sales of loans 166,834 148,988 33,265
Loans originated for sale (169,486) (149,262) (37,173)
(Gain) loss on sale of fixed assets (137) 153 36
Other adjustments 117 (102) (187)
Net change in
Interest receivable (301) 92 (521)
Interest payable 92 (250) 95
Other assets 773 (1,417) (813)
Other liabilities 82 1,680 412
--------- --------- ---------
Net cash provided by operating activities 3,968 3,814 1,927
--------- --------- ---------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (74) (9) (6)
Purchases of securities available for sale (75,323) (24,142) (13,321)
Proceeds from maturities, calls, and principal repayments of
securities available for sale 36,482 28,384 11,718
Proceeds from sales of securities available for sale 317
Purchase of Federal Reserve and Federal Home Loan Bank stock (1,591) (499) (342)
Net change in loans (70,182) (74,619) 245
Proceeds from sale of fixed assets 585 23
Recoveries on loans previously charged-off 417 683 334
Purchases of premises and equipment (1,489) (545) (651)
--------- --------- ---------
Net cash used in investing activities (111,175) (70,430) (2,000)
--------- --------- ---------
33
HORIZON BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000
--------- --------- ---------
(Continued)
FINANCING ACTIVITIES
Net change in
Deposits $ 69,660 $ 33,251 $ 22,680
Short-term borrowings 2,065 (11,804) 9,648
Federal Home Loan Bank advances 161,848 212,000 50,320
Repayment of Federal Home Loan Bank advances (120,029) (182,027) (80,000)
Proceeds from issuance of trust preferred securities 12,000
Dividends paid (1,211) (1,179) (1,228)
Re-issuance of treasury stock 60
Purchase of treasury stock (62) (48) (1,200)
--------- --------- ---------
Net cash provided by financing activities 124,271 50,193 280
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 17,064 (16,423) 207
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,628 35,051 34,844
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 35,692 $ 18,628 $ 35,051
========= ========= =========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 18,020 $ 21,220 $ 23,394
Income tax paid 3,860 2,540 2,150
See notes to consolidated financial statements.
34
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The consolidated financial statements of Horizon Bancorp
(Horizon) and its wholly owned subsidiaries, Horizon Bank, N.A. (Bank), HBC
Insurance Group, Inc. and Horizon Statutory Trust (Trust) conform to accounting
principles generally accepted in the United States of America and reporting
practices followed by the banking industry.
The Bank is a full-service commercial bank offering a broad range of commercial
and retail banking and other services incident to banking. The Bank has three
wholly-owned subsidiaries: Horizon Trust & Investment Management, Inc. (HTIM),
Horizon Investments, Inc. (Investment company) and Horizon Insurance Services,
Inc. (Insurance Agency). HTIM offers corporate and individual trust and agency
services and investment management services. Horizon Investments, Inc manages
the investment portfolio of the Bank. The Insurance Agency offers a full line of
personal insurance products. The Bank maintains four facilities in LaPorte
County, Indiana and three facilities in Porter County, Indiana. The Insurance
Company offers credit insurance. The net income generated from the insurance
operations is not significant to the overall operations of Horizon. Horizon
conducts no business except that incident to its ownership of the subsidiaries.
Horizon formed a wholly owned subsidiary in 2002, Horizon Statutory Trust I, for
the purpose of participating in a Pooled Trust Preferred Stock offering. See
Note 10 for further discussion regarding this subsidiary.
BASIS OF REPORTING -- The consolidated financial statements include the accounts
of Horizon and subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENT SECURITIES AVAILABLE FOR SALE -- Horizon designates its investment
portfolio as available for sale based on management's plans to use such
securities for asset and liability management, liquidity, and not to hold such
securities as long-term investments. Management repositions the portfolio to
take advantage of future expected interest rate trends when Horizon's long-term
profitability can be enhanced. Investment securities available for sale and
marketable equity securities are carried at estimated fair value and any net
unrealized gains/losses (after tax) on these securities are included in
accumulated other comprehensive income. Gains/losses on the disposition of
securities available for sale are recognized at the time of the transaction and
are determined by the specific identification method.
LOANS HELD FOR SALE -- Loans held for sale are reported at the lower of cost or
market value in the aggregate.
35
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
INTEREST AND FEES ON LOANS -- Interest on commercial, mortgage, and installment
loans is recognized over the term of the loans based on the principal amount
outstanding. When principal or interest is past due 90 days or more, and the
loan is not well secured and it is in the process of collection, or when serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued. Loan origination fees, net of direct loan origination costs, are
deferred and recognized over the life of the loan as a yield adjustment.
CONCENTRATIONS OF CREDIT RISK -- The Bank grants commercial, real estate, and
consumer loans to customers located primarily in LaPorte County and portions of
Porter County in Northwest Indiana and provides mortgage warehouse lines to
mortgage companies in the United States. Commercial loans make up approximately
21% of the loan portfolio and are secured by both real estate and business
assets. These loans are expected to be repaid from cash flow from operations of
the businesses. Real estate loans make up approximately 14% of the loan
portfolio and are secured by both commercial and residential real estate.
Installment loans make up approximately 15% of the loan portfolio and are
primarily secured by consumer assets. Mortgage warehouse loans make up
approximately 50% of the loan portfolio and are secured by residential real
estate.
MORTGAGE WAREHOUSE LOANS -- Horizon purchases residential mortgage loans from
various mortgage companies prior to sale of these loans by the mortgage
companies in the secondary market. Horizon held loans that were purchased under
agreements to resell from 30 approved mortgage companies at December 31, 2002.
Horizon purchases such loans from mortgage companies, net of certain fees, and
later sells them back to the mortgage companies at the same amount and without
recourse provisions. As a result, no gains and losses are recorded at the resale
of loans. Horizon records interest and fee income on the loans during the
funding period. Horizon uses the stated interest rate in the agreement with each
mortgage company for interest income recognition, and not the interest rates on
the individual loans. Horizon does not retain servicing of the loans when they
are resold. Loans consist of purchase money and refinance mortgage loans and are
generally held no more than 90 days by Horizon and are typically resold within
30 days.
ALLOWANCE FOR LOAN LOSSES -- An allowance for loan losses is maintained to
absorb loan losses inherent in the loan portfolio. The allowance is based on
ongoing quarterly assessments of the probable estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for credit losses,
which is charged against current period operating results and decreased by the
amount of chargeoffs, net of recoveries. 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
conditions or circumstances related to a credit that management believes
indicate the probability that a loss will be incurred in excess of the amount
determined by the application of the formula allowance.
36
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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.
LOAN IMPAIRMENT -- When analysis determines a borrower's operating results and
financial condition are not adequate to meet debt service requirements, the loan
is evaluated for impairment. Often this is associated with a delay or shortfall
in payments of 30 days or more. Loans are generally moved to nonaccrual status
when 90 days or more past due. These loans are also often considered impaired.
Impaired loans, or portions thereof are charged-off when deemed uncollectible.
This typically occurs when the loan is 120 or more days past due.
Loans are considered impaired if full principal or interest payments are not
made in accordance with the original terms of the loan. Impaired loans are
measured and carried at the lower of cost or the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent.
Smaller balance homogenous loans are evaluated for impairment in the aggregate.
Such loans include residential first mortgage loans secured by one to four
family residences, residential construction loans and automobile, home equity,
and second mortgages. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
PREMISES AND EQUIPMENT -- Buildings and major improvements are capitalized and
depreciated using primarily the straight-line method with useful lives ranging
from 3 to 40 years. Furniture and equipment are capitalized and depreciated
using primarily the straight-line method with useful lives ranging from 3 to 20
years. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on disposition are included
in current operations.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK -- The stock is a required
investment for institutions that are members of the Federal Reserve and Federal
Home Loan Bank systems. The required investment in the common stock is based on
a predetermined formula.
MORTGAGE SERVICING RIGHTS -- Mortgage servicing rights on originated loans that
have been sold are capitalized by allocating the total cost of the mortgage
loans between the mortgage servicing rights and the loans based on their
relative fair values. Capitalized servicing rights are amortized in proportion
to and over the period of estimated servicing revenues. Impairment of
mortgage-servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
predominant characteristic currently used for stratification is type of loan.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value. Amortization
expense and charges related to an impairment write-down are included in other
income.
INTANGIBLE ASSETS -- On January 1, 2002, Horizon adopted Statement of Financial
Accounting Standards No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS.
Under this Statement goodwill and other intangibles are periodically evaluated
for possible impairment. If impairment exists the intangible asset is written
down to its fair value through a charge to the income statement.
37
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
INCOME TAXES -- Horizon files annual consolidated income tax returns with its
subsidiaries. Income tax in the consolidated statements of income includes
deferred income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes.
TRUST ASSETS AND INCOME -- Property, other than cash deposits, held in a
fiduciary or agency capacity is not included in the consolidated balance sheets
since such property is not owned by Horizon.
EARNINGS PER COMMON SHARE AND DIVIDENDS DECLARED PER COMMON SHARE -- Basic EPS
is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For years prior to 2002, the
outstanding stock options were not included in the computation of diluted EPS
because the contracts could be settled in common stock or in cash at the
election of the option holder. Historically, all contracts had been settled in
cash and it was anticipated that the exercise of future contracts would also be
settled in cash. 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. These
agreements with option holders make it more advantageous to exercise an option
rather than a SAR whenever Horizon's stock price exceeds $22 per share,
therefore the option becomes potentially dilutive at $22 per share or higher.
The number of shares used in the computation of basic earnings per share is
1,983,596 for 2002, 1,985,458 for 2001, and 2,048,649 for 2000. The number of
shares used in the computation of diluted earnings per share for 2002 is
2,002,254.
DIVIDEND RESTRICTIONS -- Regulations of the Comptroller of the Currency limit
the amount of dividends that may be paid by a national bank to its parent
holding company without prior approval of the Comptroller of the Currency. Total
stockholder's equity for the Bank at December 31, 2002 was $53,889,250 of which
$45,233,039 was restricted from dividend distribution to Horizon. Additionally,
the Federal Reserve Board limits the amount of dividends that may be paid by
Horizon to its stockholders under its capital adequacy guidelines.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows,
cash and cash equivalents are defined to include cash and due from banks, money
market investments, and federal funds sold with maturities of one day or less.
Horizon reports net cash flows for customer loan transactions, deposit
transactions, short-term investments, and short-term borrowings.
STOCK SPLIT - On October 16, 2001, the Board of Directors of the Company
declared a three for one stock split. All share and per share amounts have been
adjusted to give effect for the stock split.
STOCK OPTIONS - At December 31, 2002, the Company has a stock-based employee
compensation plan, which is described more fully in Note 18. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the grant date. The following
table illustrates the effect on net income and earnings per share if the company
had applied the fair value provisions of FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to stock-based employee compensation.
38
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000
------ ------ ------
Net income, as reported $5,499 $4,125 $3,783
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes (4) -- --
------ ------ ------
Pro forma net income $5,495 $4,125 $3,783
====== ====== ======
Earnings per share:
Basic - as reported $ 2.77 $ 2.08 $ 1.85
Basic - pro forma $ 2.77 $ 2.08 $ 1.85
Diluted - as reported $ 2.75 $ 2.08 $ 1.85
Diluted - pro forma $ 2.74 $ 2.08 $ 1.85
RECLASSIFICATIONS -- Certain reclassifications have been made to the 2001 and
2000 financial statements to be comparable to 2002.
NOTE 2 -- INVESTMENT SECURITIES
2002
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available for sale
U. S. Treasury and federal agencies $ 5,979 $ 93 $ 6,072
State and municipal 35,504 1,611 37,115
Federal agency collateralized mortgage obligations
18,697 828 19,525
Federal agency mortgage backed pools 45,164 1,582 $ (5) 46,741
---------- ---------- ---------- ----------
Total investment securities $ 105,344 $ 4,114 $ (5) $ 109,453
========== ========== ========== ==========
2001
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available for sale
U. S. Treasury and federal agencies $ 20,255 $ 122 $ (59) $ 20,318
State and municipal 15,411 277 (378) 15,310
Federal agency collateralized mortgage obligations
17,150 469 (26) 17,593
Federal agency mortgage backed pools 13,812 310 (5) 14,117
---------- ---------- ---------- ----------
Total investment securities $ 66,628 $ 1,178 $ (468) $ 67,338
========== ========== ========== ==========
39
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale at December
31, 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.
AMORTIZED FAIR
COST VALUE
--------- ---------
Within one year $ 1,039 $ 1,065
One to five years 5,972 6,360
Five to ten years 4,323 4,641
After ten years 30,149 31,121
--------- ---------
41,483 43,187
Federal agency collateralized mortgage obligations 18,697 19,525
Federal agency mortgage backed pools 45,164 46,741
--------- ---------
Totals $ 105,344 $ 109,453
========= =========
Securities with a carrying value of $44,669,000 and $37,580,000 were pledged at
December 31, 2002 and 2001 to secure certain public and trust deposits and
securities sold under agreements to repurchase.
Proceeds from sales of securities available for sale during 2001 were $317,000.
Gross gains of $2,000 were realized on these sales. There were no sales of
securities available for sale during 2002 or 2000.
NOTE 3 -- LOANS AND ALLOWANCE
DECEMBER 31 2002 2001
-------- --------
Commercial loans $111,897 $100,912
Mortgage warehouse loans 268,452 205,511
Real estate loans 73,910 80,571
Installment loans 81,534 79,807
-------- --------
535,793 466,801
Allowance for loan losses (6,255) (5,410)
-------- --------
Total loans $529,538 $461,391
======== ========
DECEMBER 31 2002 2001 2000
------- ------- -------
Allowance for loan losses
Balances, January 1 $ 5,410 $ 4,803 $ 3,273
Provision for losses 1,625 1,505 2,010
Recoveries on loans 417 683 334
Loans charged off (1,197) (1,581) (814)
------- ------- -------
Balances, December 31 $ 6,255 $ 5,410 $ 4,803
======= ======= =======
40
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Impaired loans for which the discounted cash flows or collateral value exceeded
the carrying value of the loan totaled $162,741 and $1,028,000 at December 31,
2002 and 2001, respectively. The allowance for impaired loans, included in the
Bank's allowance for loan losses, totaled $25,000 and $242,000 at December 31,
2002 and 2001, respectively. The average balance of impaired loans during 2002
was $585,490 and $1,168,000 during 2001. There was $438 and $44,000 of interest
income recorded and received during 2002 and 2001 on impaired loans.
At December 31, 2002 and 2001, loans past due more than 90 days and still
accruing interest totaled approximately $75,981 and $128,000.
Loans on which the recognition of interest has been discontinued or reduced
totaled approximately $1,217,000, $1,772,000, and $2,487,000 at December 31,
2002, 2001, and 2000. Interest income not recognized on these loans totaled
approximately $122,000, $129,000, and $241,000 in 2002, 2001, and 2000.
Loans to directors and executive officers of Horizon and the Bank, including
associates of such persons, amounted to $5,403,000 and $6,418,000, as of
December 31, 2002 and 2001. During 2002, new loans or advances were $4,447,000
and loan payments were $5,462,000.
NOTE 4 -- PREMISES AND EQUIPMENT
DECEMBER 31 2002 2001
-------- --------
Land $ 3,126 $ 3,206
Buildings and improvements 16,978 16,536
Furniture and equipment 7,526 8,264
-------- --------
Total cost 27,630 28,006
Accumulated depreciation (11,836) (11,809)
-------- --------
Net $ 15,794 $ 16,197
======== ========
NOTE 5 -- 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 the Insurance Agency 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
$160,000 ($97,000 after-tax) as a cumulative effect of change in accounting
principle in the first quarter of 2002.
41
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
During the third quarter of 2002, it was determined that further impairment of
the goodwill related to the 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 $714,000. This reduced to zero
the carrying value of goodwill related to the Insurance Agency. The remaining
goodwill relates to HTIM.
The following table summarizes the change in the carrying amount of goodwill for
the 2002:
DECEMBER 31 2002
-------
Balance, January 1, 2002 $ 1,032
Impairment loss (874)
-------
Balance, December 31, 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 years
ended December 31, 2001 and 2000, as follows:
DECEMBER 31 2001 2000
------ ------
Reported net income $4,125 $3,783
Add back: Goodwill amortization, net of tax 55 55
------ ------
Adjusted net income $4,180 $3,838
====== ======
Basic and Diluted Earnings Per Share
Reported earnings per share $ 2.08 $ 1.85
Add back: Goodwill amortization, net of tax per share .03 .03
------ ------
Adjusted basic and diluted earnings per share $ 2.11 $ 1.88
====== ======
NOTE 6 -- LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of loans serviced for others
totaled approximately $102,409,000 and $106,140,000 at December 31, 2002 and
2001.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2002 totaled approximately $532,000. Comparable market values and a
valuation model that calculates the present value of future cash flows were used
to estimate fair value. For purposes of measuring impairment, risk
characteristics including product type, investor type, and interest rates, were
used to stratify the originated mortgage servicing rights.
42
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
2002 2001
----- -----
Mortgage Servicing Rights
Balances, January 1 $ 892 $ 316
Servicing rights capitalized 340 688
Amortization of servicing rights (293) (112)
----- -----
939 892
Impairment allowance (407)
----- -----
Balances, December 31 $ 532 $ 892
===== =====
NOTE 7 -- DEPOSITS
DECEMBER 31 2002 2001
-------- --------
Noninterest bearing demand deposits $ 51,134 $ 43,353
Interest bearing demand deposits 94,357 133,113
Money market (variable rate) 80,338 16,826
Savings deposits 32,834 32,632
Certificates of deposit of $100,000 or more 74,735 45,334
Other certificates and time deposits 155,861 148,341
-------- --------
Total deposits $489,259 $419,599
======== ========
Certificates and other time deposits maturing in years ending December 31 are as
follows:
2003 $ 96,326
2004 56,583
2005 23,256
2006 866
2007 53,565
--------
$230,596
========
NOTE 8 -- SHORT-TERM BORROWINGS
DECEMBER 31 2002 2001
------- -------
Federal funds purchased $ 2,000
Securities sold under agreements to repurchase $22,259 18,344
Notes payable, unsecured 2,150 2,000
------- -------
Total short-term borrowings $24,409 $22,344
======= =======
Securities sold under agreements to repurchase consist of obligations of the
Bank to other parties. The obligations are secured by U. S. agency and
mortgage-backed securities and such collateral is held in safekeeping by third
parties. The maximum amount of outstanding agreements at any month end during
2002 and 2001 totaled $22,379,000 and $18,358,000 and the daily average of such
agreements totaled $18,095,000 and $16,495,000. The agreements at December 31,
2002, are due on demand.
43
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Horizon has an unsecured $5,000,000 line of credit, of which $2,150,000 was
outstanding at December 31, 2002. The loan is from an unrelated financial
institution with interest payable quarterly at a rate indexed to LIBOR. The note
matures within one year.
At December 31, 2002, the Bank has available approximately $79,000,000 in credit
lines with various money center banks, including the FHLB.
NOTE 9 -- FHLB ADVANCES
DECEMBER 31 2002 2001
-------- --------
Federal Home Loan Bank advances, variable and fixed
rates ranging from 1.33% to 7.53%, due at various
dates through May 15, 2020 $147,112 $105,293
======== ========
The Federal Home Loan Bank advances are secured by first-mortgage loans and
investment securities totaling approximately $378,400,000. Advances are subject
to restrictions or penalties in the event of prepayment.
Contractual maturities in years ending December 31
2003 $ 36,678
2004 17,784
2005 8,090
2006 7,596
2007 15,103
Thereafter 61,861
--------
$147,112
========
NOTE 10 -- 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 $362,000
were capitalized and are being amortized over the estimated life of the
securities.
44
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 11-- EMPLOYEE STOCK BONUS PLAN
Horizon maintains an employee stock bonus plan (Stock Bonus Plan) that covers
substantially all employees. The Stock Bonus Plan is noncontributory and Horizon
may make discretionary matching contributions and regular contributions. Prior
to the establishment of the Stock Bonus Plan, Horizon maintained an employee
stock ownership plan. The retirement plans of Horizon own approximately 19% of
the outstanding shares.
Prior to 2001, the Stock Bonus Plan's equity was classified outside of
shareholders' equity. In 2001, Horizon's common shares became listed on a
national market system. Since the shares in the Stock Bonus Plan are now readily
tradable, Horizon reclassified the Stock Bonus Plan equity to shareholders'
equity during 2001.
Total cash contributions and expense recorded during the years 2002, 2001, and
2000 for the Stock Bonus Plan were $250,000, $150,000, and $200,000,
respectively.
Below are the transactions affecting the Stock Bonus Plan/ESOP equity accounts:
ADDITIONAL UNALLOCATED
COMMON PAID-IN ESOP
STOCK CAPITAL SHARES TOTAL
----------- ----------- ----------- -----------
Balances, January 1, 2000 $ 165 $ 7,643 $ 0 $ 7,808
Market value increase in ESOP shares released (34) (1,098) (1,132)
----------- ----------- ----------- -----------
Balances, December 31, 2000 131 6,545 0 6,676
Net Stock Bonus Plan share purchases and
distributions (131) (6,545) (6,676)
----------- ----------- ----------- -----------
Balances, December 31, 2001 and 2002 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
NOTE 12 -- EMPLOYEE THRIFT PLAN
The Employee Thrift Plan (Plan) provides that all employees of Horizon with the
requisite hours of service are eligible for the Plan. The Plan permits voluntary
employee contributions and Horizon may make discretionary matching and profit
sharing contributions. Each eligible employee is vested according to a schedule
based upon years of service. Employee voluntary contributions are vested at all
times and Horizon's discretionary contributions vest over a six-year period. The
Bank's 2002, 2001, and 2000 expense related to the thrift plan totaled $264,000,
$203,000, and $201,000.
45
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 13 -- OTHER EXPENSES
YEAR ENDED DECEMBER 31 2002 2001 2000
------ ------ ------
Supplies and printing $ 339 $ 314 $ 289
Advertising 670 651 511
Communication 644 703 628
Professional fees 1,096 1,037 826
Training 115 108 107
Outside services and consultants 944 678 776
Reinsurance company 47 48 69
Loan expenses 755 631 350
Goodwill amortization 90 90
Goodwill impairment 714
Directors fees 177 224 191
Insurance expense 316 234 212
Other 1,005 685 931
------ ------ ------
Total other expenses $6,822 $5,403 $4,980
====== ====== ======
NOTE 14 -- INCOME TAX
YEAR ENDED DECEMBER 31 2002 2001 2000
------- ------- -------
Income tax expense
Currently payable
Federal $ 2,953 $ 2,791 $ 1,526
State 528 609 443
Deferred (703) (808) (157)
------- ------- -------
Total income tax expense $ 2,778 $ 2,592 $ 1,812
======= ======= =======
Reconciliation of federal statutory
to actual tax expense Federal
statutory income tax at 34% $ 2,847 $ 2,284 $ 1,902
Tax exempt interest (534) (145) (150)
Nondeductible and other 117 51 (32)
Effect of state income taxes 348 402 292
Decrease in valuation allowance (200)
------- ------- -------
Actual tax expense $ 2,778 $ 2,592 $ 1,812
======= ======= =======
Tax expense applicable to securities gains for 2001 was $792. There were no
security sales in 2002 or 2000.
46
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
DECEMBER 31 2002 2001
------- -------
ASSETS
Allowance for loan losses $ 2,388 $ 1,626
Accrued operating expenses 85 66
Loan fees 41 42
Director and employee benefits 568 543
------- -------
Total assets 3,082 2,277
------- -------
LIABILITIES
Depreciation (667) (659)
Other (178) (84)
Unrealized gain on securities available for sale (1,438) (280)
------- -------
Total liabilities (2,283) (1,023)
------- -------
Net deferred tax asset $ 799 $ 1,254
======= =======
The valuation allowance at December 31, 1999 was $200,000. The valuation
allowance decreased $200,000 during 2000 and there was no valuation allowance at
December 31, 2002, 2001 or 2000. The decrease in the valuation allowance was a
result of Horizon generating taxable income in 2000 that utilized the
alternative minimum tax (AMT) credit carryforward.
NOTE 15 -- OTHER COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31 2002 2001 2000
------- ------- -------
Unrealized gains on securities:
Unrealized holding gains arising during the year $ 3,398 $ 695 $ 1,984
Less: reclassification adjustment for gains realized in net income 2
------- ------- -------
Net unrealized gains 3,398 693 1,984
Tax expense (1,157) (272) (774)
------- ------- -------
Other comprehensive income $ 2,241 $ 421 $ 1,210
======= ======= =======
47
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
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, after consultation with counsel, 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.
The Bank was required to have approximately $10,391,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and clearing
balance requirements at December 31, 2002. These balances are included in cash
and cash equivalents and do not earn interest.
The Bank is a party to financial instruments with off-balance sheet risk in the
ordinary course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans and standby letters of
credit. The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank follows the same credit policy to make such commitments as
is followed for those loans recorded in the financial statements.
At December 31, 2002 and 2001, commitments to make loans amounted to
approximately $63,571,190 and $50,543,000 and commitments under outstanding
standby letters of credit amounted to approximately $1,632,000 and $1,445,000.
Since many commitments to make loans and standby letters of credit expire
without being used, the amount does not necessarily represent future cash
advances. No losses are anticipated as a result of these transactions.
Collateral obtained upon exercise of the commitment is determined using
management's credit evaluation.
NOTE 17 -- REGULATORY CAPITAL
Horizon and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier I capital, and Tier I leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 2002 and 2001,
Horizon and the Bank are categorized as well capitalized and met all subject
capital adequacy requirements.
During the course of a periodic examination by the Bank's regulators that
commenced in February 2003, the examination personnel raised the issue of
whether the Bank's mortgage warehouse loans should be treated as other loans
rather than home mortgages for call report purposes. If these loans are treated
as other loans for regulatory reporting purposes, it would change the
calculations for risk based capital and reduce the Bank's risk-based capital
ratios. Management believes that it has properly characterized the loans in its
mortgage warehouse loan portfolio for risk-based capital purposes, but there is
no assurance that the regulators will concur with that determination. Should the
call report classification of the loans be changed, Horizon and the Bank would
still be categorized as well capitalized at December 31, 2002, but would only be
categorized as adequately capitalized at December 31, 2001.
48
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Horizon's and the Bank's actual and required capital amounts and ratios are as
follows:
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED(1)
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL(1) CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES REQUIREMENTS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 2002
Total capital(1) (to risk-weighted assets)
Consolidated $55,729 13.37% $33,355 8.00% N/A N/A
Bank 56,207 13.55 33,195 8.00 $41,494 10.00%
Tier I capital(1) (to risk-weighted assets)
Consolidated 50,529 12.12 16,677 4.00 N/A N/A
Bank 51,007 12.29 16,597 4.00 24,896 6.00
Tier I capital(1) (to average assets)
Consolidated 50,529 7.13 28,342 4.00 N/A N/A
Bank 51,007 7.20 28,341 4.00 35,426 5.00
AS OF DECEMBER 31, 2001
Total capital(1) (to risk-weighted assets)
Consolidated $37,940 10.41% $29,144 8.00% N/A N/A
Bank 39,127 10.78 29,000 8.00 $36,311 10.00%
Tier I capital(1) (to risk-weighted assets)
Consolidated 33,390 9.17 14,572 4.00 N/A N/A
Bank 34,577 9.52 14,525 4.00 21,787 6.00
Tier I capital(1) (to average assets)
Consolidated 33,390 5.86 22,793 4.00 N/A N/A
Bank 34,577 6.07 22,771 4.00 28,464 5.00
(1) As defined by regulatory agencies
NOTE 18-- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Horizon maintains the 1987 Nonqualified Stock Option and Stock Appreciation
Right Plan (1987 Plan) under which options and stock appreciation rights (SARs)
were granted to certain officers and employees. SARs entitle eligible employees
to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock
covered by the option over the option's exercise price. The underlying stock
options are deemed to have been exercised upon exercise of the SARs. No options
were available for grant at December 31, 2002, 2001, and 2000, however,
outstanding options may be exercised until their expiration.
49
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Horizon recognizes compensation expense related to the 1987 Plan on a periodic
basis based on the difference between the excess of the fair market value of the
shares of common stock over the exercise price for SARs and those options
exercised during the year. In the third quarter of 2002 Horizon entered into
agreements with participants that capped the value of their SAR's at $22 per
share and discontinued any future vesting. No additional compensation expense is
recognized when the fair value of Horizon stock exceeds $22 per share as there
is a presumption that participants will exercise their options rather than the
SAR's. Horizon recorded a reduction in compensation expense related to the 1987
Plan of $13,000 in 2002, and $206,000 in 2000. Horizon recorded compensation
expense of $342,000 in 2001.
A summary of transactions for the 1987 Plan follows:
SHARES WEIGHTED-
------------------------- AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
----------- ----------- -----------
Balances, January 1, 2001 0 50,400 $ 8.87
----------- ----------- -----------
Exercised (36,000) 10.20
----------- ----------- -----------
Balances, December 31, 2001 0 14,400 5.51
Exercised (2,400) 4.50
----------- ----------- -----------
Balances, December 31, 2002 0 12,000 5.71
=========== =========== ===========
The options granted under the 1987 Plan are fully vested.
The following table summarizes information about stock options under the 1987
Plan outstanding at December 31, 2002:
OPTIONS
OUTSTANDING
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE
- ------------------------ ----------- ----------- ----------- -----------
$4.50 7,500 8.08 years $ 4.50 7,500
$7.50 to $8.17 4,500 6.71 years $ 7.72 4,500
Under Horizon's 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan),
which is accounted for in accordance with Accounting Principles Board Opinion
(APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations, Horizon may grant certain officers and employees stock option
awards or stock appreciation rights which vest and become fully exercisable at
the end of five years of continued employment. SARs entitle eligible employees
to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock
covered by the option over the option exercise price. The underlying stock
options are deemed to have been exercised upon exercise of the SARs. In the
third quarter of 2002 Horizon entered into agreements with participants that
capped the value of their SAR's at $22 per share and discontinued any future
vesting. No additional compensation expense is recognized when the fair value of
Horizon stock exceeds $22 per share as there is a presumption that participants
will exercise their options rather than the SAR's. Horizon recorded compensation
expense of $437,000 and $671,000 related to the 1997 plan in 2002 and 2001
respectively. There was no compensation expense related to the 1997 plan in
2000.
50
HORIZON BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A summary of transactions for the 1997 Plan follows:
SHARES WEIGHTED-
AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
----------- ----------- -----------
Balances, January 1, 2000 152,400 117,600 $ 17.33
Granted (143,400) 143,400 11.70
Forfeitures 46,800 (46,800) 15.12
----------- ----------- -----------
Balances, December 31, 2000 55,800 214,200 13.92
Granted (55,800) 55,800 9.64
Forfeitures 3,000 (3,000) 16.56
----------- ----------- -----------
Balances, December 31, 2001 and 2002 3,000 267,000 12.95
=========== =========== ===========
The options granted under the 1997 Plan vest at a rate of 20% per year.
The following table summarizes information about stock options under the 1997
Plan outstanding at December 31, 2002:
OPTIONS
OUTSTANDING
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE
- ------------------------ ----------- ----------- ----------- -----------
$9.33 to $11.25 120,900 17.74 years $ 9.69 20,160
$13.83 to $16.75 128,100 16.64 years $ 15.05 38,460
$20.00 18,000 15.56 years $ 20.00 14,400
Horizon applies APB No. 25 and related interpretations in accounting for its
plans. Had compensation cost for Horizon's plans been determined based on the
fair value at the grant dates using Statement of Financial Accounting Standards
(SFAS) No. 123, the Company's net income would have decreased by $4,000 for
2002. Prior to capping the SAR's, all options had been settled in cash and it
was anticipated that all future contracts would also be settled in cash,
therefore the options were not included in the computation of diluted earnings
per share for 2001 or 2000.
51
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 19-- FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts were determined using available market
information, current pricing information applicable to Horizon and various
valuation methodologies. Where market quotations were not available,
considerable management judgement was involved in the determination of estimated
fair values. Therefore, the estimated fair value of financial instruments shown
below may not be representative of the amounts at which they could be exchanged
in a current or future transaction. Due to the inherent uncertainties of
expected cash flows of financial instruments, the use of alternate valuation
assumptions and methods could have a significant effect on the derived estimated
fair value amounts.
The estimated fair values of financial instruments, as shown below, are not
intended to reflect the estimated liquidation or market value of Horizon taken
as a whole. The disclosed fair value estimates are limited to Horizon's
significant financial instruments at December 31, 2002 and 2001. These include
financial instruments recognized as assets and liabilities on the consolidated
balance sheet as well as certain off-balance sheet financial instruments. The
estimated fair values shown below do not include any valuation of assets and
liabilities which are not financial instruments as defined by SFAS No. 107
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, such as the value of real
property, the value of core deposit intangibles, the value of mortgage servicing
rights, nor the value of anticipated future business.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS -- The carrying amounts approximate fair value.
INTEREST-BEARING DEPOSITS -- The carrying amounts approximate fair value.
INVESTMENT SECURITIES -- For debt and marketable equity securities available for
sale and held to maturity, fair values are based on quoted market prices or
dealer quotes. For those securities where a quoted market price is not
available, carrying amount is a reasonable estimate of fair value based upon
comparison with similar securities.
NET LOANS -- The fair value of portfolio loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The carrying amounts of loans held for sale approximate fair value.
INTEREST RECEIVABLE/PAYABLE -- The carrying amounts approximate fair value.
FHLB AND FRB STOCK -- Fair value of FHLB and FRB stock is based on the price at
which it may be resold to the FHLB and FRB.
DEPOSITS -- The fair value of demand deposits, savings accounts,
interest-bearing checking accounts, and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future cash flows using
rates currently offered for deposits of similar remaining maturity.
SHORT-TERM BORROWINGS -- The carrying amounts approximate fair value.
52
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
FEDERAL HOME LOAN BANK ADVANCES -- Rates currently available to the Bank for
debt with similar terms and remaining maturities are used to estimate fair
values of existing advances.
GUARANTEED PREFERRED BENEFICIAL INTEREST IN HORIZON BANCORP'S SUBORDINATED
DEBENTURES -- Rates currently available for debentures with similar terms and
remaining maturities are used to estimate fair values of existing debentures.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTER OF CREDIT -- The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date. Due to the short-term nature of these agreements, carrying
amounts approximate fair value.
The estimated fair values of Horizon's financial instruments are as follows:
2002 2001
------------------- -------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
ASSETS
Cash and cash equivalents $ 35,692 $ 35,692 $ 18,628 $ 18,628
Interest-bearing deposits 321 321 247 247
Investment securities available for sale 109,453 109,453 67,338 67,338
Loans including loans held for sale, net 542,158 556,055 468,207 470,936
Interest receivable 3,510 3,510 3,209 3,209
Stock in FHLB and FRB 8,329 8,329 6,738 6,738
LIABILITIES
Noninterest-bearing deposits 51,134 51,134 43,353 43,353
Interest-bearing deposits 438,125 456,400 376,246 379,093
Short-term borrowings 24,409 24,409 22,344 22,344
Federal Home Loan Bank advances 147,112 151,960 105,293 106,962
Guaranteed preferred beneficial interests in
Horizon Bancorp's subordinated debentures 12,000 12,000
Interest payable 857 857 765 765
53
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 20 -- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of Horizon Bancorp:
CONDENSED BALANCE SHEETS
DECEMBER 31 2002 2001
------- -------
ASSETS
Total cash and cash equivalents $ 618 $ 210
Investment in Bank 53,889 36,130
Investment in Insurance Company 492 469
Dividends receivable from Bank 300
Other assets 1,698 919
------- -------
Total assets $56,697 $38,028
======= =======
LIABILITIES
Short-term borrowings $ 2,150 $ 2,000
Guaranteed preferred beneficial
interests in Horizon Bancorp's
subordinated debentures 12,000
Other liabilities 1,137 1,085
STOCKHOLDERS' EQUITY 41,410 34,943
------- -------
Total liabilities and stockholders' equity $56,697 $38,028
======= =======
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 2002 2001 2000
------ ------ ------
OPERATING INCOME (EXPENSE)
Dividend income from Bank $2,550 $ 600 $2,750
Investment income 28 39
Other income 26 44
Interest expense (598) (165) (224)
Employee benefit expense (250) (163) (200)
Other expense (98) (35) (85)
------ ------ ------
INCOME BEFORE DISTRIBUTED INCOME OF SUBSIDIARIES 1,604 291 2,324
UNDISTRIBUTED INCOME OF SUBSIDIARIES 3,542 3,725 1,290
------ ------ ------
INCOME BEFORE TAX 5,146 4,016 3,614
INCOME TAX BENEFIT 353 109 169
------ ------ ------
NET INCOME $5,499 $4,125 $3,783
====== ====== ======
54
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 5,499 $ 4,125 $ 3,783
Items not requiring (providing) cash
Equity in undistributed net income of Bank (3,519) (3,662) (1,221)
Equity in undistributed net income of Insurance Company (23) (63) (55)
Distributions in excess of (equity in undistributed) net income of
The Loan Store (14)
Investment securities gains (2)
Change in
Income taxes receivable (353) 377 364
Dividends receivable from Bank 300 (300) 300
Other assets (53) 445 (412)
Other liabilities 52 47 (186)
-------- -------- --------
Net cash provided by operating activities 1,903 967 2,559
-------- -------- --------
INVESTING ACTIVITIES
Investment in Bank (12,000)
Investment in Statutory Trust I (372)
Proceeds from sales of securities available for sale 317
-------- -------- --------
Net cash provided by (used in) investing activities (12,372) 317
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (1,211) (1,179) (1,228)
Change in short-term borrowings 150 (750) 250
Reissuance of treasury stock 60
Proceeds from issuance of trust preferred securities 12,000
Purchase of treasury stock (62) (48) (1,200)
-------- -------- --------
Net cash provided by (used in) financing activities 10,877 (1,977) (2,118)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 408 (693) 441
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 210 903 462
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 618 $ 210 $ 903
======== ======== ========
55
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 21 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly consolidated results of operations:
THREE MONTHS ENDED 2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Interest income $ 9,276 $ 10,036 $ 10,828 $ 11,125
Interest expense 4,021 4,596 4,754 4,741
------------ ------------ ------------ ------------
Net interest income 5,255 5,440 6,074 6,384
Provision for loan losses 375 375 375 500
Income before cumulative effect of
change in accounting principle 1,202 1,291 1,528 1,575
Net income 1,105 1,291 1,528 1,575
Earnings per share before cumulative
effect of change in accounting
principle
Basic $ 0.61 $ 0.65 $ 0.77 $ 0.79
============ ============ ============ ============
Diluted $ 0.61 $ 0.65 $ 0.77 $ 0.77
============ ============ ============ ============
Earnings per share
Basic $ 0.56 $ 0.65 $ 0.77 $ 0.79
============ ============ ============ ============
Diluted $ 0.56 $ 0.65 $ 0.77 $ 0.77
============ ============ ============ ============
Average shares outstanding
Basic 1,985,700 1,983,326 1,982,700 1,982,700
============ ============ ============ ============
Diluted 1,985,700 1,983,326 1,982,700 2,057,328
============ ============ ============ ============
THREE MONTHS ENDED 2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Interest income $ 10,501 $ 10,443 $ 9,850 $ 9,983
Interest expense 6,012 5,545 4,972 4,441
------------ ------------ ------------ ------------
Net interest income 4,489 4,898 4,878 5,542
Provision for loan losses 352 353 300 500
Net income 938 1,053 1,124 1,010
Earnings per share
Basic $ 0.47 $ 0.53 $ 0.57 $ 0.51
============ ============ ============ ============
Diluted $ 0.47 $ 0.53 $ 0.57 $ 0.51
============ ============ ============ ============
Average shares outstanding
Basic 1,985,943 1,985,784 1,985,794 1,984,334
============ ============ ============ ============
Diluted 1,985,943 1,985,784 1,985,794 1,984,334
============ ============ ============ ============
56
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and
Board of Directors
Horizon Bancorp
Michigan City, Indiana
We have audited the consolidated balance sheets of Horizon Bancorp (Horizon) as
of December 31, 2002 and 2001 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of Horizon's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Horizon
Bancorp as of December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 5 to the consolidated financial statements, Horizon Bancorp
changed its method of accounting for goodwill during 2002 in accordance with
Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
/s/ BKD, LLP
Fort Wayne, Indiana
January 31, 2003
57
HORIZON BANCORP
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the financial
statements and related notes on the preceding pages. The statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America appropriate in the circumstances and include amounts
that are based on management's best estimates and judgments. Financial
information elsewhere in the Annual Report is consistent with that in the
consolidated financial statements.
In meeting its responsibility for the accuracy of the consolidated financial
statements, management relies on Horizon's system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are properly recorded to permit the preparation
of appropriate financial information. The system of internal controls is
supplemented by a program of internal audits to independently evaluate the
adequacy and application of financial and operating controls and compliance with
Company policies and procedures.
The Audit Committee of the Board of Directors meets periodically with
management, the independent accountants and the internal auditors to ensure that
each is properly discharging its responsibilities with regard to the
consolidated financial statements and internal accounting controls. The
independent accountants have full and free access to the Audit Committee and
meet with it to discuss auditing and financial reporting matters.
The consolidated financial statements in the Annual Report have been audited by
BKD, LLP, independent public accountants, for 2002, 2001, and 2000. Their audits
were conducted in accordance auditing standards generally accepted in the United
State of America and included a consideration of internal accounting controls,
tests of accounting records and other audit procedures to the extent necessary
to allow them to express their opinion on the fairness of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America.
58
HORIZON BANCORP
SUMMARY OF SELECTED FINANCIAL DATA
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
EARNINGS
Net interest income $ 23,153 $ 19,807 $ 18,654 $ 15,132 $ 14,517
Provision for loan losses 1,625 1,505 2,010 1,100 820
Total noninterest income 10,249 9,521 6,856 5,882 5,453
Total noninterest expense 23,403 21,106 17,905 19,430 17,436
Provision for income taxes 2,778 2,592 1,812 675 460
---------- ---------- ---------- ---------- ----------
Net income (loss) from continuing
operations 5,596 4,125 3,783 (191) 1,254
Cumulative effective of change in
accounting for goodwill, net of tax (97)
Loss, net of tax, from discontinued
operations (163) (171)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 5,499 $ 4,125 $ 3,783 $ (354) $ 1,083
========== ========== ========== ========== ==========
Cash dividend declared $ 1,211 $ 1,179 $ 1,228 $ 1,218 $ 1,237
========== ========== ========== ========== ==========
PER SHARE DATA
Net income (loss) basic $ 2.77 $ 2.08 $ 1.85 $ (.18) $ .53
Net income (loss) diluted 2.75 2.08 1.85 (.18) .53
Cash dividends declared .61 .60 .60 .60 .60
Book value at period end 20.89 17.60 15.90 13.93 15.49
Weighted average shares outstanding:
Basic 1,983,596 1,985,458 2,048,649 1,966,173 2,060,412
Diluted 2,002,254 1,985,458 2,048,649 1,966,173 2,060,412
PERIOD END TOTALS
Loans, net of deferred loan fees and
unearned income $ 535,793 $ 466,801 $ 393,578 $ 394,357 $ 290,346
Allowance for loan losses 6,255 5,410 4,803 3,273 2,787
Total assets 720,130 587,945 531,776 525,996 416,154
Total deposits 489,259 419,599 386,348 363,668 322,401
Total borrowings 171,521 127,637 109,468 129,500 58,000
59
HORIZON BANCORP
SUMMARY OF SELECTED FINANCIAL DATA
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
(Continued)
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
RATIOS
Loan to deposit 109.51% 111.25% 101.87% 108.44% 90.06%
Loan to total funding 79.56 85.30 79.38 84.14 77.14
Return on average assets .86 .76 .73 (.08) .29
Average stockholders' equity to
average total assets 6.06 6.29 5.92 7.01 8.82
Return on average stockholders' equity 14.21 12.11 12.41 (1.13) 3.27
Dividend payout ratio (dividends
divided by net income) 22.02 28.85 32.43 N/A 114.25
Price to book value ratio 126.85 129.83 59.21 95.72 96.82
Price to earnings ratio 9.64 12.94 5.10 N/A 28.48
All share and per share amounts have been adjusted for the three-for-one stock
split declared October 16, 2001.
60
HORIZON BANCORP AND SUBSIDIARIES
HORIZON'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS
Horizon common stock is traded on the NASDAQ Small Cap market under the symbol
"HBNC." The following table sets forth, for the periods indicated, the high and
low prices per share. Also summarized below are the cash dividends declared by
quarter for 2002 and 2001. All amounts in the table have been adjusted for the
three-for-one stock split declared October 16, 2001.
2002
-------------------------------------
COMMON STOCK PRICES DIVIDENDS
----------------------- DECLARED
HIGH LOW PER SHARE
--------- --------- ---------
First Quarter $ 23.60 $ 18.62 $ .15
Second Quarter 23.30 19.60 .15
Third Quarter 23.00 19.61 .15
Fourth Quarter 26.50 21.75 .16
2001
-------------------------------------
COMMON STOCK PRICES DIVIDENDS
----------------------- DECLARED
HIGH LOW PER SHARE
--------- --------- ---------
First Quarter $ 12.67 $ 9.21 $ .15
Second Quarter 14.17 12.33 .15
Third Quarter 14.33 13.50 .15
Fourth Quarter 23.50 14.17 .15
There can be no assurance as to the amount of future dividends on Horizon common
stock since future dividends are subject to the discretion of the Board of
Directors, cash needs, general business conditions and dividends from the bank
subsidiary.
The approximate number of holders of outstanding common stock, based upon the
number of record holders as of December 31, 2002 is 609.
FORM 10-K
Horizon will provide without charge to each stockholder upon written request to
Mary McColl, Shareholder Relations, Horizon Bancorp, 515 Franklin Square,
Michigan City, Indiana 46360, a copy of Horizon's Annual Report on Form 10-K,
including the Financial Statements and schedules thereto required to be filed
with the Securities and Exchange Commission for Horizon's most recent fiscal
year.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
This information is omitted from this report pursuant to General Instruction G.
(3) of Form 10-K as Horizon intends to file with the Commission its definitive
Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, not later than 120 days after December 31, 2002.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
Proxy statement section captioned "Board of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy statement section captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy statement section captioned "Common Stock Ownership by Directors and
Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy statement section captioned "Certain Business Relationships and
Transactions."
ITEM 14. 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.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:
1. FINANCIAL STATEMENT
See the Financial Statements included in Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted for the reason that they are not
required or are not applicable, or the required information is included in
the financial statements.
3. EXHIBITS
The exhibits filed as part of this Annual Report on Form 10-K are
identified in the Exhibit Index, which Exhibit Index specifically
identifies those exhibits that describe or evidence all management
contracts and compensation plans or arrangements required to be filed as
exhibits to this Report. Such Exhibit Index is incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2002.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Registrant
DATE: March 21, 2003 By: /S/ CRAIG M. DWIGHT
---------------------
Craig M. Dwight
President and Chief Executive
Officer (Principal Executive
Officer)
DATE: March 21, 2003 By : /S/ JAMES H. FOGELSONG
------------------------
James H. Foglesong
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DATE SIGNATURE AND TITLE
- ---- -------------------
March 21, 2003 /s/ Robert C. Dabagia
----------------------------------------
Robert C. Dabagia, Chairman of the Board
and Director
March 21, 2003 /s/ Craig M. Dwight
----------------------------------------
Craig M. Dwight, President and Chief
Executive Officer and Director
March 21, 2003 /s/ Susan D. Aaron
----------------------------------------
Susan D. Aaron, Director
March 21, 2003 /s/ Dale W. Alspaugh
----------------------------------------
Dale W. Alspaugh, Director
March 21, 2003 /s/ Charley E. Gillispie
----------------------------------------
Charley E. Gillispie, Director
March 21, 2003 /s/ Robert E. McBride
----------------------------------------
Robert E. McBride, Director
64
March 21, 2003 /s/ Peter L. Pairitz
----------------------------------------
Peter L. Pairitz, Director
March 21, 2003 /s/ Larry N. Middleton
----------------------------------------
Larry N. Middleton, Director
March 21, 2003 /s/ Bruce E. Rampage
----------------------------------------
Bruce E. Rampage, Director
March 21, 2003 /s/ Gene L. Rice
----------------------------------------
Gene L. Rice, Director
March 21, 2003 /s/ Robert E. Swinehart
----------------------------------------
Robert E. Swinehart, Director
March 21, 2003 /s/ Spero W. Valavanis
----------------------------------------
Spero W. Valavanis, Director
CERTIFICATIONS
I, Craig M. Dwight, certify that:
1. I have reviewed this annual report on Form 10-K of Horizon Bancorp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 use
by others within those entities, particularly during the
period in which this annual 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 annual report (the "Evaluation Date");
and
c. Presented in this annual 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 officer 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.
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal
65
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
HORIZON BANCORP
By: /s/ Craig M. Dwight
------------------------------------
Craig M. Dwight
President and Chief Executive Officer
I, James H. Foglesong, certify that:
1. I have reviewed this annual report on Form 10-K of Horizon Bancorp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 use
by others within those entities, particularly during the
period in which this annual 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 annual report (the "Evaluation Date");
and
c. Presented in this annual 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 officer 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.
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not 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.
HORIZON BANCORP
By: /s/ James H. Foglesong
-------------------------------------
James H. Foglesong
Chief Financial Officer
66
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
Exhibit
Number Description Incorporated by Reference/Attached
- ------ ----------- ----------------------------------
3.1 Articles of Incorporation of Incorporated by Reference to
Horizon Bancorp, as amended Exhibit 3.1 to Horizon's Form 10-Q
for the Quarter Ended September
30, 2001
3.2 Amended and Restated Bylaws of Attached
Horizon Bancorp (as adopted
January 21, 2003)
10.1* 1987 Stock Option and Stock Incorporated by Reference to
Appreciation Rights Plan of Exhibit 10.1 to Registrant's Form
Horizon Bancorp, as amended 10-K for the Year Ended December
31, 2001.
10.2* Nonqualified Stock Option and Incorporated by Reference to
Stock Appreciation Rights Exhibit 10.2 to Registrant's Form
Agreement between Horizon Bancorp 10-K for the Year Ended December
and Craig M. Dwight 31, 2001
10.3* Supplemental Employee Retirement Incorporated by Reference to
Plan, as amended Exhibit 10.3 to Registrant's Form
10-K for the Year Ended December
31, 2001
10.4* 1997 Key Employees Stock Option Incorporated by Reference to
and Stock Appreciation Rights Exhibit 10.4 to Registrant's Form
Plan 10-K for the Year Ended December
31, 1999
10.5* Directors Deferred Compensation Incorporated by Reference to
Plan Exhibit 10.8 to Registrant's Form
10-K for the Year Ended December
31, 1999
10.6* Employment Agreement between Incorporated by Reference to
Horizon Bank, N.A., and Lawrence Exhibit 10.9 to Registrant's Form
J. Mazur 10-K for the Year Ended December
31, 1999
10.7* Form of Change of Control Incorporated by Reference to
Agreement Exhibit 10.10 to Horizon's Form
10-K for the Year Ended December
31, 1999
67
10.8* Form of Amendment to Change in Incorporated by Reference to
Control Agreement and Schedule Exhibit 10.8 to Registrant's Form
Identifying Material Details of 10-K for the Year Ended December
Individual Agreements 31, 2001
10.9* Form of Amendment No. 1 to Incorporated by Reference to
Horizon Bancorp Stock Option and Exhibit 10.1 to Registrant's Form
Stock Appreciation Rights 10-Q for the Quarter Ended
Agreement and Schedule September 30, 2002
Identifying Material Details of
Individual Amendments
21 Subsidiaries of Horizon Attached
23 Consent of BKD, LLP Attached
99.1 Certification of Craig M. Dwight Attached
Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of James H. Attached
Foglesong Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002
*Indicates exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as exhibits to this Form
10-K.
68