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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 SEPTEMBER 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:
2,981,250 at October 31, 2003
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
(All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split
Declared October 21, 2003)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
----------- ----
ASSETS
Cash and due from banks $ 17,392 $ 23,568
Interest-bearing demand deposits 15,932 124
Federal funds sold 40,900 12,000
--------- ---------
Cash and cash equivalents 74,224 35,692
Interest-bearing deposits 346 321
Investment securities, available for sale 189,476 109,453
Loans held for sale 3,314 12,620
Loans, net of allowance for loan losses of $6,750 and $6,255 452,299 529,538
Premises and equipment 15,473 15,794
Federal Reserve and Federal Home Loan Bank stock 10,731 8,329
Interest receivable 3,832 3,510
Other assets 5,394 4,873
--------- ---------
Total assets $ 755,089 $ 720,130
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 62,272 $ 51,134
Interest bearing 472,928 438,125
--------- ---------
Total deposits 535,200 489,259
Short-term borrowings 20,564 24,409
Federal Home Loan Bank advances 135,972 147,112
Guaranteed preferred beneficial interests in Horizon Bancorp's subordinated
debentures 12,000 12,000
Interest payable 764 857
Other liabilities 5,758 5,083
--------- ---------
Total liabilities 710,258 678,720
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value
Authorized, 1,000,000 shares
No shares issued
Common stock, $.2222 stated value
Authorized, 22,500,000 shares
Issued, 4,680,126 and 4,672,926 shares 1,040 1,038
Additional paid-in capital 20,925 20,808
Retained earnings 36,992 32,418
Accumulated other comprehensive income 1,399 2,671
Less treasury stock, at cost, 1,698,881 shares (15,525) (15,525)
--------- ---------
Total stockholders' equity 44,831 41,410
--------- ---------
Total liabilities and stockholders' equity $ 755,089 $ 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)
(All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split
Declared October 21, 2003)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2003 2002 2003 2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
INTEREST INCOME
Loans receivable $ 9,431 $ 9,125 $ 26,681 $ 25,608
Investment securities
Taxable 1,110 1,326 3,390 3,685
Tax exempt 553 377 1,453 847
-------- -------- -------- --------
Total interest income 11,094 10,828 31,524 30,140
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 2,542 2,707 7,538 8,092
Federal funds purchased and short-term borrowings 142 116 322 286
Federal Home Loan Bank advances 1,663 1,764 4,749 4,645
Subordinated debentures 141 167 439 348
-------- -------- -------- --------
Total interest expense 4,488 4,754 13,048 13,371
-------- -------- -------- --------
NET INTEREST INCOME 6,606 6,074 18,476 16,769
Provision for loan losses 300 375 1,050 1,125
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,306 5,699 17,426 15,644
-------- -------- -------- --------
OTHER INCOME
Service charges on deposit accounts 818 772 2,346 2,155
Fiduciary activities 610 593 1,797 1,776
Commission income from insurance agency 66 213 201 548
Income from reinsurance company 19 12 48 40
Gain on sale of loans 1,116 1,302 3,327 2,280
Loss on sale of securities (267) (273)
Other income 466 347 1,229 954
-------- -------- -------- --------
Total other income 2,828 3,239 8,675 7,753
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 3,662 3,145 10,366 9,176
Net occupancy expenses 428 414 1,299 1,256
Data processing and equipment expenses 499 560 1,522 1,667
Other expenses 1,700 2,494 5,059 5,297
-------- -------- -------- --------
Total other expenses 6,289 6,613 18,246 17,396
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR GOODWILL 2,845 2,325 7,855 6,001
Income tax expense 817 797 2,328 1,980
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR
GOODWILL 2,028 1,528 5,527 4,021
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR GOODWILL (NET
OF INCOME TAXES OF $63) (97)
-------- -------- -------- --------
NET INCOME $ 2,028 $ 1,528 $ 5,527 $ 3,924
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Before Cumulative Effect of a Change in Accounting for Goodwill $ .68 $ .51 $ 1.86 $ 1.35
Cumulative Effect of a Change in Accounting for Goodwill (.03)
-------- -------- -------- --------
$ .68 $ .51 $ 1.86 $ 1.32
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Before Cumulative Effect of a Change in Accounting for Goodwill $ .65 $ .51 $ 1.78 $ 1.35
Cumulative Effect of a Change in Accounting for Goodwill (.03)
-------- -------- -------- --------
$ .65 $ .51 $ 1.78 $ 1.32
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Table Dollar Amounts in Thousands)
ADDITIONAL ACCUMULATED 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 $5,527 5,527 5,527
Other comprehensive
income, net of tax,
unrealized losses on
securities (1,272) (1,272) (1,272)
------
Comprehensive income $4,255
======
Exercise of stock options 2 104 106
Tax benefit related to
stock options 13 13
Cash dividends ($.32 per
share) (953) (953)
------ ------- ------- ------ -------- -------
BALANCES, SEPTEMBER 30, 2003 $1,040 $20,925 $36,992 $1,399 $(15,525) $44,831
====== ======= ======= ====== ======== =======
See notes to condensed consolidated financial statements.
4
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income $ 5,527 $ 3,924
Items not requiring (providing) cash
Provision for loan losses 1,050 1,125
Depreciation and amortization 1,133 1,092
Federal Home Loan Bank stock dividend (203)
Goodwill impairment 874
Deferred income tax (839) 1,132
Investment securities amortization, net 826 (21)
Gain on sale of loans (3,327) (2,280)
Proceeds from sales of loans 195,125 110,815
Loans originated for sale (182,492) (107,632)
Loss on sale of other real estate owned (142)
Deferred loan fees (21) (5)
Unearned income (311) (154)
Loss on sale of securities 273
Loss on sale of fixed assets 4
Net change in
Interest receivable (322) (212)
Interest payable (93) (3)
Other assets 1,049 (794)
Other liabilities 675 396
--------- ---------
Net cash provided by operating activities 18,054 8,115
--------- ---------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (25) (5)
Purchases of securities available for sale (163,051) (68,549)
Proceeds from maturities, calls, and principal repayments of securities available for
sale 52,749 25,949
Proceeds from sale of securities 27,178
Purchase of Federal Home Loan Bank or Federal Reserve Bank stock (2,199) (1,591)
Net change in loans 76,302 (37,134)
Recoveries on loans previously charged-off 219 302
Purchases of premises and equipment (817) (961)
--------- ---------
Net cash used in investing activities (9,644) (81,989)
--------- ---------
FINANCING ACTIVITIES
Net change in
Deposits 45,941 66,462
Short-term borrowings (3,845) 90
Federal Home Loan Bank advance 152,998 141,848
Repayment of Federal Home Loan Bank advance (164,138) (115,029)
Proceeds from issuance of trust preferred securities 12,000
Issuance of stock 119
Dividends paid (953) (893)
Purchase of treasury stock (62)
--------- ---------
Net cash provided by financing activities 30,122 104,416
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENT 38,532 30,542
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,692 18,628
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 74,224 $ 49,170
========= =========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 13,141 $ 13,374
Income tax paid 2,600 2,910
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 September 30, 2003
and September 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 nine
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 $14.67 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 $14.67 per share, therefore the option becomes potentially
dilutive at $14.67 per share or higher. The number of shares used in the
computation of basic earnings per share is 2,976,846 and 2,975,847 for the
nine-month period ended September 30, 2003 and 2002. The number of shares used
in the computation of diluted earnings per share for the nine-month period ended
September 30,2003 is 3,099,729. There were no dilutive securities outstanding
during the nine-month period ended September 30, 2002. All share and per share
amounts have been adjusted for a three for two stock split declared October 21,
2003.
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 SEPTEMBER 30 2003 2002
- ------------------------------- ---- ----
Net income, as reported $2,028 $1,528
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (11) 0
------ ------
Pro forma net income $2,017 $1,528
====== ======
Earnings per share:
Basic - as reported $ .68 $ .51
Basic - pro forma .68 .51
Diluted - as reported .65 .51
Diluted - pro forma .65 .51
NINE MONTHS ENDED SEPTEMBER 30 2003 2002
- ------------------------------ ---- ----
Net income, as reported $5,527 $3,924
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (75) 0
------ ------
Pro forma net income $5,452 $3,924
====== ======
Earnings per share:
Basic - as reported $ 1.86 $ 1.32
Basic - pro forma 1.83 1.32
Diluted - as reported 1.78 1.32
Diluted - pro forma 1.76 1.32
NOTE 2 -- INVESTMENT SECURITIES
2003
----
GROSS GROSS
UNREALIZED UNREALIZED FAIR
SEPTEMBER 30 AMORTIZED COST GAINS LOSSES VALUE
- ------------ -------------- ----- ------ -----
Available for sale
U. S. Treasury and federal agencies $ 58,551 $ 65 $(401) $ 58,215
State and municipal 55,104 1,833 (341) 56,596
Federal agency collateralized mortgage
obligations 15,765 259 16,024
Federal agency mortgage backed pools 57,304 691 57,995
Corporate Notes 600 46 646
-------- ------ ----- --------
Total investment securities $187,324 $2,894 $(742) $189,476
======== ====== ===== ========
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 September
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 $ 2,147 $ 2,168
One to five years 53,647 53,401
Five to ten years 9,757 9,734
After ten years 48,704 50,154
-------- --------
114,255 115,457
Federal agency collateralized mortgage obligations 15,765 16,024
Federal agency mortgage backed pools 57,304 57,995
-------- --------
$187,324 $189,476
======== ========
Realized gross gains and (losses) on the sale of securities available for sale
are summarized below as follows:
FOR THE PERIOD ENDED SEPTEMBER 30 2003
- --------------------------------- ----
Realized gains $140
Realized losses 413
----
Net realized losses $273
====
Proceeds from the sales of securities available for sale was $27,178,000 for the
nine month period ended September 30, 2003. There were no sales of securities
available for sale for the nine month period ending September 30, 2002.
8
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Commercial loans $ 133,136 $ 111,897
Mortgage warehouse loans 164,831 268,452
Real estate loans 66,449 73,910
Installment loans 94,633 81,534
--------- ---------
459,049 535,793
Allowance for loan losses (6,750) (6,255)
--------- ---------
Total loans $ 452,299 $ 529,538
========= =========
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Allowance for loan losses
Balances, beginning of period $ 6,255 $ 5,410
Provision for losses, operations 1,050 1,625
Recoveries on loans 219 417
Loans charged off (774) (1,197)
------- -------
Balances, end of period $ 6,750 $ 6,255
======= =======
NOTE 5 -- NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31
2003 2002
---- ----
Nonperforming loans $1,848 $1,293
Other real estate owned 0 0
------ ------
Total nonperforming assets $1,848 $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 nine months ended
September 30, 2003 and 2002, were:
2003 2002
---- ----
Balance as of January 1 $158 $1,032
Impairment loss (874)
---- ------
Balance as of September 30 $158 $ 158
==== ======
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. During the third quarter of 2002, it was determined that
further impairment of the goodwill related to the Bank's insurance agency
existed. This was based on offers received while attempting to market the
commercial and group health and life, lines of business of the Insurance Agency.
Therefore, a second impairment test was conducted and a further write down of
goodwill related to the insurance agency was taken as a charge to other expense
of $714 thousand ($428 thousand after tax). This reduced to zero the carrying
value of goodwill related to the insurance agency.
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 NINE MONTHS ENDED SEPTEMBER 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, with respect to Horizon Bancorp
("Horizon" or "Company") and Horizon Bank, N.A. (Bank) and Horizon's other
subsidiaries. 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. All share and per share
amounts have been adjusted for a three for two stock split declared October 21,
2003.
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 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.
10
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance. The unallocated
allowance is based upon management's evaluation of various conditions, the
effects of which are not directly measured in the determination of the formula
and specific allowances. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific credits. The conditions evaluated in connection
with the unallocated allowance may include factors such as local, regional, and
national economic conditions and forecasts, and adequacy of loan policies and
internal controls, the experience of the lending staff, bank regulatory
examination results, and changes in the composition of the portfolio.
Horizon considers the allowance for loan losses of $6.750 million adequate to
cover losses inherent in the loan portfolio as of September 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
nine months ended September 30, 2003, cash and cash equivalents increased by
approximately $38.5 million. These funds were provided by a decrease in loans
outstanding and an increase in deposits. Funds were also used to increase
investment securities held by Horizon. At September 30, 2003, in addition to
liquidity provided from the normal operating, funding, and investing activities
of Horizon, the Bank has available approximately $186 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 September 30, 2003.
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at September 30, 2003. Stockholders' equity totaled
$44.831 million as of September 30, 2003 compared to $41.410 million as of
December 31, 2002. The change in stockholders' equity during the nine months
ended September 30, 2003 is the result of net income, net of dividends declared,
a decrease in the market value of investment securities available for sale and
the issuance of new shares related to the exercise of stock options. At
September 30, 2003, the ratio of stockholders' equity to assets was 5.94%
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-
11
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
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 September 30, 2003.
There have been no other material changes in Horizon's capital resources from
December 31, 2002 to September 30, 2003.
Material Changes in Financial Condition - September 30, 2003 compared to
December 31, 2002
During the first nine months of 2003, cash and cash equivalents increased
approximately $38.5 million, investment securities increased approximately $80
million and loans outstanding decreased approximately $77 million. The increase
in cash and cash equivalents is primarily overnight investments. The increased
investments were primarily short term (Federal agency securities with
contractual maturities of less than five years and Federal agency mortgage
backed pools with estimated average lives of less than five years) 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 decrease in loans
outstanding occurred primarily in the mortgage warehouse area and is related to
a decrease 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. Installment loan growth primarily related to home equity second mortgage
loans and indirect automobile loans.
Deposits increased approximately $46 million during the period. Non-interest
bearing deposits grew primarily from corporate and public fund deposits. The
growth in interest bearing deposits, occurred primarily in short term negotiable
Certificates of Deposit, as well as Money Market Accounts.
FHLB advances decreased approximately $11 million as funds are no longer needed
to fund mortgage warehouse loans. 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 September 30, 2003.
RESULTS OF OPERATIONS
Material Changes in Results of Operations - Three months ended September 30,
2003 compared to the three months ended September 30, 2002
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
During the three months ended September 30, 2003, net income totaled $2.028
million or $.65 per diluted share compared to $1.528 million or $.51 per diluted
share for the same period in 2002.
Net interest income was $6.606 million for the three months ended September 30,
2003, compared to $6.074 million for the same period 2002. The increase was the
result of an increase in average earning assets to approximately $754 million,
an increase of $132 million over the same period of 2002. This is partly offset
by a decline in net interest margin from 3.96% for the third quarter of 2002 to
3.58% for the same period of 2003 due to continued downward pressure on interest
rates.
12
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Total noninterest income was $2.828 million for the three months ended September
30, 2003 compared to $3.239 million for the same period in 2002. During the
third quarter, approximately $10.8 million of investment securities were sold at
a pretax loss of $267 thousand. These securities had an average yield of 2.63%
and an estimated average life of 8.7 years. These funds were reinvested in
securities with a yield of 4.77% and an average life of 4.81 years. Due to the
increased yield, the loss should be recovered in approximately 14 months. The
impact on 2003 will be an after tax reduction in net income of approximately
$123 thousand, but should positively impact 2004 and future years by
approximately $139 thousand per year after tax.
Noninterest expense decreased $324 thousand for the three months ended September
30, 2003 compared to the same period in 2002. The decrease relates primarily to
a $714 thousand charge taken in 2002 for impairment of goodwill. This was
partially offset by additional 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 September 30, 2003 and 2002.
Material Changes in Results of Operations - Nine months ended September 30, 2003
compared to the nine months ended September 30, 2002
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
During the nine months ended September 30, 2003, net income totaled $5.527
million or $1.78 per diluted share compared to $3.924 million or $1.32 per
diluted share for the same period in 2002. Net income before a cumulative effect
of a change in accounting for goodwill was $4.021 million or $1.35 per share for
the nine months ended September 30, 2002.
Net interest income was $18.476 million for the nine months ended September 30,
2003, compared to $16.769 million for the same period 2002. The increase was the
result of an increase in average earning assets to approximately $701 million,
an increase of approximately $124 million over the same period of 2002. This is
partly offset by a decline in net interest margin from 3.93% for the first nine
months of 2002 to 3.58% due to continued downward pressure on interest rates.
The provision for loan losses totaled $1.050 million for the nine months ended
September 30, 2003 compared to $1.125 million for the first nine months of 2002.
The allowance for loan losses to total loans is 1.47% at September 30, 2003
compared to 1.16% at December 31, 2002.
Total noninterest income was $8.675 million for the nine months ended September
30, 2003 compared to $7.753 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 nine months ended September 30, 2003, the gain on sale of
mortgage loans totaled $3.327 million based on the sale of approximately $192
million of mortgage loans. This compares to a gain of $2.280 million based on
the sale of approximately $109 million in the same period of the prior year.
Noninterest expense increased $850 thousand or 4.9% for the nine months ended
September 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
13
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
additional loan volume and professional fees increased due to additional
reporting requirements and revisions to Horizon's Articles of Incorporation.
There have been no other material changes in the results of operations of
Horizon for nine months ending September 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 NINE MONTHS ENDED SEPTEMBER 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 September 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-15(e)). 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
HORIZON BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 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
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Amended and Restated Articles of Incorporation of
Horizon Bancorp, as amended October 27, 2003
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
16
(b) A Form 8-K was filed on October 24, 2003 to furnish the earnings
release issued by the Registrant on October 24, 2003 as required by
Item 12 of Form 8-K. No other reports on Form 8-K were filed during
the three months ended September 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
11-4-03 /s/ Craig M. Dwight
- ------------- ------------------------------------------
Date: BY: Craig M. Dwight
President and Chief Executive Officer
Nov. 4, 2003 /s/ James H. Foglesong
- ------------- ------------------------------------------
Date: BY: James H. Foglesong
Chief Financial Officer
18
INDEX TO EXHIBITS
The following documents are included as Exhibits to this Report.
Exhibit
- -------
3.1 Amended and Restated Articles of Incorporation of Horizon Bancorp, as
amended October 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