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HORIZON BANCORP
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
450 5th Street N.W.
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
------- ----------
(State or other jurisdiction of incorporation or organization) (I.R. S. Employer Identification No.)
515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 879-0211
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,987,500 at AUGUST 4, 2003
--------------
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 30,783 $ 23,568
Interest-bearing demand deposits 2,310 124
Federal funds sold 12,000
--------- ---------
Cash and cash equivalents 33,093 35,692
Interest-bearing deposits 536 321
Investment securities, available for sale 154,617 109,453
Loans held for sale 4,927 12,620
Loans, net of allowance for loan losses of $6,622 and $6,255 552,662 529,538
Premises and equipment 15,674 15,794
Federal Reserve and Federal Home Loan Bank stock 9,759 8,329
Interest receivable 3,448 3,510
Other assets 4,399 4,873
--------- ---------
Total assets $ 779,115 $ 720,130
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 58,197 $ 51,134
Interest bearing 431,245 438,125
--------- ---------
Total deposits 489,442 489,259
Short-term borrowings 48,252 24,409
Federal Home Loan Bank advances 178,478 147,112
Guaranteed preferred beneficial interests in Horizon Bancorp's subordinated
debentures 12,000 12,000
Interest payable 697 857
Other liabilities 5,320 5,083
--------- ---------
Total liabilities 734,189 678,720
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value
Authorized, 1,000,000 shares
No shares issued
Common stock, $.33 1/3 stated value
Authorized, 15,000,000 shares
Issued, 3,120,084 and 3,115,284 shares 1,040 1,038
Additional paid-in capital 20,925 20,808
Retained earnings 35,283 32,418
Accumulated other comprehensive income 3,203 2,671
Less treasury stock, at cost, 1,132,587 shares (15,525) (15,525)
--------- ---------
Total stockholders' equity 44,926 41,410
--------- ---------
Total liabilities and stockholders' equity $ 779,115 $ 720,130
========= =========
See notes to condensed consolidated financial statements
2
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------
2003 2002 2003 2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
INTEREST INCOME
Loans receivable $ 8,739 $ 8,221 $ 17,250 $ 16,483
Investment securities
Taxable 1,004 1,471 2,280 2,359
Tax exempt 512 344 900 470
-------- -------- -------- --------
Total interest income 10,255 10,036 20,430 19,312
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 2,412 2,695 4,996 5,385
Federal funds purchased and short-term borrowings 107 74 180 170
Federal Home Loan Bank advances 1,603 1,657 3,086 2,881
Subordinated debentures 148 170 298 181
-------- -------- -------- --------
Total interest expense 4,270 4,596 8,560 8,617
-------- -------- -------- --------
NET INTEREST INCOME 5,985 5,440 11,870 10,695
Provision for loan losses 375 375 750 750
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,610 5,065 11,120 9,945
-------- -------- -------- --------
OTHER INCOME
Service charges on deposit accounts 804 722 1,528 1,383
Fiduciary activities 631 630 1,187 1,183
Commission income from insurance agency 78 159 135 335
Income from reinsurance company 15 8 29 28
Gain on sale of loans 1,190 453 2,211 978
Loss on sale of securities (6) (6)
Other income 346 169 763 466
-------- -------- -------- --------
Total other income 3,058 2,141 5,847 4,373
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 3,455 3,103 6,704 6,031
Net occupancy expenses 431 399 871 842
Data processing and equipment expenses 535 549 1,023 1,107
Other expenses 1,734 1,328 3,359 2,662
-------- -------- -------- --------
Total other expenses 6,155 5,379 11,957 10,642
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR GOODWILL 2,513 1,827 5,010 3,676
Income tax expense 738 536 1,511 1,183
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR
GOODWILL 1,775 1,291 3,499 2,493
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR GOODWILL (NET
OF INCOME TAXES OF $63) (97)
-------- -------- -------- --------
NET INCOME $ 1,775 $ 1,291 $ 3,499
$ 2,396
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Before Cumulative Effect of a Change in Accounting for Goodwill $ .89 $ .65 $ 1.76 $ 1.26
Cumulative Effect of a Change in Accounting for Goodwill (.05)
-------- -------- -------- --------
$ .89 $ .65 $ 1.76 $ 1.21
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Before Cumulative Effect of a Change in Accounting for Goodwill $ .86 $ .65 $ 1.70 $ 1.26
Cumulative Effect of a Change in Accounting for Goodwill (.05)
-------- -------- -------- --------
$ .86 $ .65 $ 1.70 $ 1.21
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Table Dollar Amounts in Thousands)
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL
------ ---------- ------------- -------- ------------- -------- -----
BALANCES, DECEMBER 31, 2002 $1,038 $20,808 $32,418 $2,671 $(15,525) $41,410
Net income $3,499 3,499 3,499
Other comprehensive
income, net of tax,
unrealized gains on
securities 532 532 532
------
Comprehensive income $4,031
======
Exercise of stock options 2 104 106
Tax benefit related to
stock options 13 13
Cash dividends ($.16 per
share) (634) (634)
------ ------- ------- ------ -------- -------
BALANCES, JUNE 30, 2003 $1,040 $20,925 $35,283 $3,203 $(15,525) $44,926
====== ======= ======= ====== ======== =======
See notes to condensed consolidated financial statements.
4
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
SIX MONTHS ENDED JUNE 30
-----------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income $ 3,499 $ 2,396
Items not requiring (providing) cash
Provision for loan losses 750 750
Depreciation and amortization 743 734
Federal Home Loan Bank stock dividend (104)
Goodwill impairment 160
Deferred income tax (655) (103)
Investment securities amortization, net 639
Gain on sale of loans (2,211) (978)
Proceeds from sales of loans 146,592 65,777
Loans originated for sale (136,688) (59,524)
Loss on sale of other real estate owned 100
Deferred loan fees (17) (1)
Unearned income (193) (66)
Loss on sale of securities 6
Loss on sale of fixed assets 4
Net change in
Interest receivable 62 (69)
Interest payable (160) (53)
Other assets 842 853
Other liabilities 237 (221)
--------- ---------
Net cash provided by operating activities 13,346 9,755
--------- ---------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (215) (4)
Purchases of securities available for sale (94,868) (63,261)
Proceeds from maturities, calls, and principal repayments of securities available for 33,575 12,255
sale
Proceeds from sale of securities 16,313
Purchase of Federal Home Loan Bank or Federal Reserve Bank stock (1,326) (750)
Net change in loans (23,811) 31,080
Recoveries on loans previously charged-off 147 259
Purchases of premises and equipment (637) (182)
--------- ---------
Net cash used in investing activities (70,822) (20,603)
--------- ---------
FINANCING ACTIVITIES
Net change in
Deposits 183 17,033
Short-term borrowings 23,843 (5,648)
Federal Home Loan Bank advance 102,998 80,164
Repayment of Federal Home Loan Bank advance (71,632) (50,029)
Proceeds from issuance of trust preferred securities 12,000
Issuance of stock 119
Dividends paid (634) (596)
Purchase of treasury stock (62)
--------- ---------
Net cash provided by financing activities 54,877 52,862
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENT (2,599) 42,014
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,692 18,628
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,093 $ 60,642
========= =========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 8,720 $ 8,670
Income tax paid 1,600 1,505
See notes to condensed consolidated financial statements.
5
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A.
(Bank), HBC Insurance Group, Inc. (Insurance Company) and Horizon Statutory
Trust I (Trust). All intercompany balances and transactions have been
eliminated. The results of operations for the periods ended June 30, 2003 and
June 30, 2002 are not necessarily indicative of the operating results for the
full year of 2003 or 2002. The accompanying unaudited consolidated financial
statements reflect all adjustments that are, in the opinion of Horizon's
management, necessary to fairly present the financial position, results of
operations and cash flows of Horizon for the periods presented. Those
adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizon's annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Horizon's Form
10-K annual report for 2002 filed with the Securities and Exchange Commission.
The consolidated balance sheet of Horizon as of December 31, 2002 has been
derived from the audited balance sheet of Horizon as of that date.
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. 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 the first six
months of 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 1,983,438 and 1,984,507 for the six-month period
ended June 30, 2003 and 2002. The number of shares used in the computation of
diluted earnings per share for the six-month period ended June 30,2003 is
2,073,172. There were no dilutive securities outstanding during the six-month
period ended June 30, 2002.
Horizon accounts for these plans 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.
6
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
THREE MONTHS ENDED JUNE 30 2003 2002
- -------------------------- ---- ----
Net income, as reported $ 1,775 $ 1,291
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (14) 0
--------- ---------
Pro forma net income $ 1,761 $ 1,291
========= =========
Earnings per share:
Basic - as reported $ .89 $ .65
Basic - pro forma .89 .65
Diluted - as reported .86 .65
Diluted - pro forma .85 .65
SIX MONTHS ENDED JUNE 30 2003 2002
- ------------------------ ---- ----
Net income, as reported $ 3,499 $ 2,396
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (63) 0
--------- ---------
Pro forma net income $ 3,436 $ 2,396
========= =========
Earnings per share:
Basic - as reported $ 1.76 $ 1.21
Basic - pro forma 1.73 1.21
Diluted - as reported 1.70 1.21
Diluted - pro forma 1.67 1.21
NOTE 2 -- INVESTMENT SECURITIES
2003
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
JUNE 30 AMORTIZED COST GAINS LOSSES VALUE
- ------- ----------------- ---------------- ----------------- -----------------
Available for sale
U. S. Treasury and federal agencies $ 42,814 $ 187 $ 43,001
State and municipal 54,061 3,337 $(13) 57,385
Federal agency collateralized mortgage
obligations 16,618 330 16,948
Federal agency mortgage backed pools 35,596 1,065 (3) 36,658
Corporate Notes 600 25 625
--------- ------- ---- --------
Total investment securities $149,689 $ 4,944 $(16) $154,617
========= ======= ==== ========
7
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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
======== ======== ======== ========
The amortized cost and fair value of securities available for sale at June 30,
2003, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE
-------------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
Within one year $ 1,991 $ 2,031
One to five years 34,461 35,424
Five to ten years 13,232 13,366
After ten years 47,791 50,190
---------- ----------
97,475 101,011
Federal agency collateralized mortgage obligations 16,618 16,948
Federal agency mortgage backed pools 35,596 36,658
---------- ----------
$ 149,689 $ 154,617
========== ==========
Realized net gains and (losses) on the sale of securities available for sale are
summarized below as follows:
FOR THE PERIOD ENDED JUNE 30 2003
- ---------------------------- ----
Realized gains $ 93
Realized losses (99)
----
Net realized losses $ (6)
====
Proceeds from the sales of securities available for sale was $16,313,000 for the
six month period ended June 30, 2003. There were no sales of securities
available for sale for the six month period ending June 30, 2002.
8
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS
JUNE 30, December 31,
2003 2002
-------- ------------
Commercial loans $ 129,740 $ 111,897
Mortgage warehouse loans 282,030 268,452
Real estate loans 58,262 73,910
Installment loans 89,252 81,534
--------- ---------
559,284 535,793
Allowance for loan losses (6,622) (6,255)
--------- ---------
Total loans $ 552,662 $ 529,538
========= =========
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
JUNE 30, December 31,
2003 2002
-------- ------------
Allowance for loan losses
Balances, beginning of period $ 6,255 $ 5,410
Provision for losses, operations 750 1,625
Recoveries on loans 147 417
Loans charged off (530) (1,197)
------- -------
Balances, end of period $ 6,622 $ 6,255
======= =======
NOTE 5 -- NONPERFORMING ASSETS
JUNE 30, December 31,
2003 2002
-------- ------------
Nonperforming loans $1,656 $1,293
Other real estate owned 142 0
------ ------
Total nonperforming assets $1,798 $1,293
====== ======
9
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6 -- GOODWILL
The changes in the carrying amount of goodwill for the six months ended June 30,
2003 and 2002, were:
2003 2002
---- ----
Balance as of January 1 $ 158 $1,032
Impairment loss (160)
------ ------
Balance as of March 31 $ 158 $ 872
====== ======
Goodwill impairment testing was performed which compared the fair value of the
Insurance Agency reporting unit to its carrying value. Market value multiples
for comparable agencies, as well as other factors, were used as the basis for
determining the fair value of the Insurance Agency. As a result of this testing,
Horizon recorded an impairment loss on goodwill of $160 thousand ($97 thousand
after-tax) as a cumulative effect of change in accounting method in the first
quarter of 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Horizon intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of Horizon, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Horizon's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on Horizon's
future activities and operating results include, but are not limited to, changes
in: interest rates, general economic conditions, legislative and regulatory
changes, U.S. monetary and fiscal policies, demand for products and services,
deposit flows, competition and accounting policies, principles and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
INTRODUCTION
The purpose of this discussion is to focus on Horizon's financial condition,
changes in financial condition and the results of operations in order to provide
a better understanding of the consolidated financial statements included
elsewhere herein. This discussion should be read in conjunction with the
consolidated financial statements and the related notes.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements included in Item 8 on Form
10-K contain a summary of the Company's significant accounting policies and are
presented on pages 35-38 of Form 10-K for 2002. Certain of these policies are
important to the portrayal of the Company's financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain. Management has
identified the allowance for loan losses as a 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. 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 judgment, affect the collectibility of the portfolio as of the
evaluation date. Specific allowances are established in cases where management
has identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance.
11
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The conditions evaluated in
connection with the unallocated allowance may include factors such as local,
regional, and national economic conditions and forecasts, and adequacy of loan
policies and internal controls, the experience of the lending staff, bank
regulatory examination results, and changes in the composition of the portfolio.
Horizon considers the allowance for loan losses of $6.622 million adequate to
cover losses inherent in the loan portfolio as of June 30, 2003. 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.
FINANCIAL CONDITION
Liquidity
- ---------
The Bank maintains a stable base of core deposits provided by long standing
relationships with consumers and local businesses. These deposits are the
principal source of liquidity for Horizon. Other sources of liquidity for
Horizon include earnings, loan repayment, investment security sales and
maturities, sale of real estate loans and borrowing relationships with
correspondent banks, including the Federal Home Loan Bank (FHLB). During the six
months ended June 30, 2003, cash and cash equivalents decreased by approximately
$2.6 million. These funds along with funds provided by a additional FHLB debt
and other short-term borrowings were used primarily to purchase additional
investment securities and fund loan growth. At June 30, 2003, in addition to
liquidity provided from the normal operating, funding, and investing activities
of Horizon, the Bank has available approximately $90 million in unused credit
lines with various money center banks including the FHLB.
There have been no other material changes in the liquidity of Horizon from
December 31, 2002 to June 30, 2003.
Capital Resources
- -----------------
The capital resources of Horizon and Bank exceed regulatory capital ratios for
"well capitalized" banks at June 30, 2003. Stockholders' equity totaled $44.926
million as of June 30, 2003 compared to $41.410 million as of December 31, 2002.
The change in stockholders' equity during the six months ended June 30, 2003 is
the result of net income, net of dividends declared, an increase in the market
value of investment securities available for sale and the issuance of new shares
related to the exercise of stock options. At June 30, 2003, the ratio of
stockholders' equity to assets was 5.77% compared to 5.75% at December 31, 2002.
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
12
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
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 June 30, 2003.
There have been no other material changes in Horizon's capital resources from
December 31, 2002 to June 30, 2003.
Material Changes in Financial Condition - June 30, 2003 compared to December 31,
- --------------------------------------------------------------------------------
2002
- ----
During the first six months of 2003, investment securities increased
approximately $45 million and loans outstanding increased approximately $23
million. The increased investments were primarily short term but did include
approximately $15 million of tax exempt municipal securities which were match
funded against a specific borrowing at the FHLB. This transaction locked in an
interest spread of approximately 174 basis points. The increase in loans
outstanding occurred primarily in the mortgage warehouse area and is related to
an increase in residential mortgage refinance activity. Real estate loans
declined due to refinance activity as the new loans are sold into the secondary
market. Commercial loans increased primarily in loans secured by commercial real
estate.
Deposits were fairly level during the period. The decline in interest bearing
deposits, primarily short term negotiable Certificates of Deposit, was offset by
an increase in noninterest bearing deposits primarily from public funds.
Short-term borrowings increased approximately $24 million, primarily from
Federal Funds purchased. FHLB advances increased approximately $31 million to
fund long-term investments mentioned above and short-term advances were used to
fund the loan growth were repaid as these funds were no longer needed to support
loan activity. Horizon continues to monitor funding sources to reduce the cost
of funds and maintain adequate liquidity.There have been no other material
changes in the financial condition of Horizon from December 31, 2002 to June 30,
2003.
RESULTS OF OPERATIONS
Material Changes in Results of Operations - Three months ended June 30, 2003
- ----------------------------------------------------------------------------
compared to the three months ended June 30, 2002
- ------------------------------------------------
During the three months ended June 30, 2003, net income totaled $1.775 million
or $.86 per diluted share compared to $1.291 million or $.65 per diluted share
for the same period in 2002.
Net interest income was $5.985 million for the three months ended June 30, 2003,
compared to $5.440 million for the same period 2002. The increase was the result
of an increase in average earning assets over the same period of 2002 of
approximately $104 million. This is partly offset by a decline in net interest
margin from 3.82% for the first six months of 2002 to 3.58% due to continued
downward pressure on interest rates.
Total noninterest income was $3.058 million for the three months ended June 30,
2003 compared to $2.141 million for the same period in 2002. This increase
relates primarily to an increased gain on the sale of loans into the secondary
market. During the three months ended June 30, 2003, the gain on sale of
mortgage loans totaled $1.190 million based on the sale of approximately
$59.7million of mortgage loans. This compares to a gain of $453 thousand based
on the sale of approximately $20.3 million in the same period of the prior year.
13
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
Noninterest expense increased $776 thousand or 14.4% for the three months ended
June 30, 2003 compared to the same period in 2002. The increase relates to
commissions paid to mortgage loan originators and additional staffing for new
market expansion. Also loan expense increased due to additional loan volume.
There have been no other material changes in the results of operations of
Horizon for the three months ending June 30, 2003 and 2002.
Material Changes in Results of Operations - Six months ended June 30, 2003
- --------------------------------------------------------------------------
compared to the six months ended June 30, 2002
- ----------------------------------------------
During the six months ended June 30, 2003, net income totaled $3.499 million or
$1.70 per diluted share compared to $2.396 million or $1.21 per diluted share
for the same period in 2002. Net income before a cumulative effect of a change
in accounting for goodwill was $2.493 million or $1.26 per share for the six
months ended June 30, 2002.
Net interest income was $11.870 million for the six months ended June 30, 2003,
compared to $10.695 million for the same period 2002. The increase was the
result of an increase in average earning assets over the same period of 2002 of
approximately $101 million. This is partly offset by a decline in net interest
margin from 3.92% for the first six months of 2002 to 3.60% due to continued
downward pressure on interest rates.
The provision for loan losses totaled $750 thousand for the six months ended
June 30, 2003 which is the same as the provision taken in the six months of
2002. The allowance for loan losses to total loans is 1.18% at June 30, 2003
compared to 1.16% at December 31, 2002.
Total noninterest income was $5.847 million for the six months ended June 30,
2003 compared to $4.373 million for the same period in 2002. This increase
relates primarily to an increased gain on the sale of loans into the secondary
market. During the six months ended June 30, 2003, the gain on sale of mortgage
loans totaled $2.211 million based on the sale of approximately $112.6 million
of mortgage loans. This compares to a gain of $978 thousand based on the sale of
approximately $52.2 million in the same period of the prior year.
Noninterest expense increased $1.315 million or 12.4% for the six months ended
June 30, 2003 compared to the same period in 2002. The increase relates to
commissions paid to mortgage loan originators and additional staffing for new
market expansion. Also loan expense increased due to additional loan volume and
professional fees increased due to additional reporting requirements and
revisions to Horizon's Articles of Incorporation. For the three months ended
June 30, 2003 compared to the same period of the prior year, the items affecting
the quarterly comparison are comparable to those discussed above for the
year-to-date results.
There have been no other material changes in the results of operations of
Horizon for six months ending June 30, 2003 and 2002.
14
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon currently does not engage in any derivative or hedging activity. Refer
to Horizon's 2002 Form 10-K for analysis of its interest rate sensitivity.
Horizon believes there have been no significant changes in its interest rate
sensitivity since it was reported in its 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
- ------------------------------------------------
Based on an evaluation of disclosure controls and procedures as of June 30,
2003, 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.
15
HORIZON BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2003
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
(a) The Company held its Annual Shareholders' Meeting on May 8, 2003.
(c) (1) The names of the Directors elected at the Annual Meeting were as
follows:
Name Votes For Votes Withheld
---- --------- --------------
Robert C. Dabagia 1,598,357 230,669
Peter L. Pairitz 1,768,523 60,503
Bruce E. Rampage 1,752,794 76,232
Spero W. Valavanis 1,625,430 203,596
(2) A proposal to approve the Horizon Bancorp 2003 Omnibus Equity
Incentive Plan. A total of 1,451,356 shares were voted for and
153,012 shares were voted against this proposal. There were 11,614
abstentions and 213,043 broker nonvotes.
(3) A proposal to authorize one million preferred shares. A total of
1,307,705 shares were voted for and 289,123 shares were voted
against this proposal. There were 19,154 abstentions and 213,043
broker nonvotes.
(4) A proposal to adopt individual provisions of the Amended and
Restated Articles of Incorporation:
a. Replace the current "business combination" provisions with
provisions that more closely reflect current Indiana
corporate law. A total of 1,541,902 shares were voted for
and 55,706 shares were voted against this proposal. There
were 18,375 abstentions and 213,043 broker nonvotes.
b. Revise the director removal provisions to allow directors
to be removed for cause by the affirmative vote of
two-thirds of the other directors. A total of 1,524,643
shares were voted for and 82,734 shares were voted
against. There were 8,606 abstentions and 213,043 broker
nonvotes.
16
c. Revise the indemnification provisions to provide that
indemnification of employees is no longer mandatory and to
more closely reflect current Indiana corporate law. A
total of 1,510,043 shares were voted for and 81,258 were
voted against this proposal. There were 11,509 abstentions
and 213,043 broker nonvotes.
d. Revise the director conflicts of interest provisions to
limit their application to directors and authorize
transactions that are approved by the shareholders or are
fair to Horizon. A total of 1,510,099 share were voted for
and 99,385 were voted against this proposal. There were
6,499 abstentions and 213,043 broker nonvotes.
e. Revise the indemnification provisions to limit mandatory
indemnification to directors and officers and reflect
current Indiana corporate law. A total of 1,510,043 shares
were voted for and 48,612 were voted against. There were
23,709 abstentions and 213,043 broker nonvotes.
f. Make other technical changes to reflect current Indiana
corporate law. A total of 1,543,662 shares were voted for
and 48,612 were voted against this proposal. There were
23,709 abstentions and 213,043 broker nonvotes.
ITEM 5. OTHER INFORMATION
- --------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
- -----------------
Exhibit 3 Amended and Restated Articles of Incorporation
Exhibit 11 Statement Regarding Computation of Per Share Earnings
Exhibit 31.1 Certification of Craig M. Dwight
Exhibit 31.2 Certification of James H. Foglesong
Exhibit 32 Certification of Chief Executive and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) A Form 8-K was filed on April 18, 2003 to furnish the earnings release
issued by the Registrant on April 17, 2003 as required by Item 12 of
form 8-K. No other reports on Form 8-K were filed during the three
months ended June 30, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON BANCORP
8-11-2003 /s/ Craig M. Dwight
- ----------------------- -------------------------------------------
Date: BY: Craig M. Dwight
President and Chief Executive Officer
8-11-2003 /s/ James H. Foglesong
- ----------------------- -------------------------------------------
Date: BY: James H. Foglesong
Chief Financial Officer
18
INDEX TO EXHIBITS
The following documents are filed as Exhibits to this Report.
Exhibit
- -------
3 Amended and Restated Articles of Incorporation. This exhibit
is incorporated by reference to Appendix C to the Definitive
Proxy Statement for the Horizon Bancorp 2003 Annual Meeting of
Shareholders filed on March 27, 2003.
11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Craig M. Dwight
31.2 Certification of James H. Foglesong
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19