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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 MARCH 31, 2004
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
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(State or other jurisdiction of incorporation or organization) (I.R. S. Employer Identification No.)
515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360
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(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:
2,966,014 at May 7, 2004
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)
MARCH 31,
2004 DECEMBER 31,
(UNAUDITED) 2003
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 15,105 $ 28,434
Interest-bearing demand deposits 1 30
Federal funds sold 17,000
------------------------------
Cash and cash equivalents 15,106 45,464
Interest-bearing deposits 2,460 9,135
Investment securities, available for sale 238,412 215,695
Loans held for sale 3,387 8,213
Loans, net of allowance for loan losses of $6,951 and $6,909 514,264 440,809
Premises and equipment 16,529 16,460
Federal Reserve and Federal Home Loan Bank stock 10,977 10,853
Interest receivable 4,170 3,769
Other assets 18,189 7,045
------------------------------
Total assets $ 823,494 $ 757,443
==============================
LIABILITIES
Deposits
Noninterest bearing $ 61,922 $ 71,157
Interest bearing 513,242 475,011
------------------------------
Total deposits 575,164 546,168
Short-term borrowings 48,121 20,241
Federal Home Loan Bank advances 133,264 125,972
Subordinated debentures 12,372 12,372
Interest payable 745 751
Other liabilities 4,717 5,716
------------------------------
Total liabilities 774,383 711,220
+==============================
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, 4,693,895 and 4,684,095 shares 1,043 1,041
Additional paid-in capital 21,136 20,994
Retained earnings 38,796 37,638
Accumulated other comprehensive income 3,661 2,075
Less treasury stock, at cost, 1,698,881 shares (15,525) (15,525)
------------------------------
Total stockholders' equity 49,111 46,223
------------------------------
Total liabilities and stockholders' equity $ 823,494 $ 757,443
+==============================
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 MARCH 31
-------------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable $ 7,422 $ 8,511
Investment securities:
Taxable 1,836 1,290
Tax exempt 573 388
-------------------------------
Total interest income 9,831 10,189
-------------------------------
INTEREST EXPENSE
Deposits 2,607 2,584
Federal funds purchased and short-term borrowings 74 73
Federal Home Loan Bank advances 1,403 1,483
Subordinated debentures 158 164
-------------------------------
Total interest expense 4,242 4,304
-------------------------------
NET INTEREST INCOME 5,589 5,885
Provision for loan losses 246 375
-------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,343 5,510
-------------------------------
OTHER INCOME
Service charges on deposit accounts 756 724
Fiduciary activities 638 556
Commission income from insurance agency 187 57
Income from reinsurance company 14
Gain on sale of loans 548 1,021
Other income 566 417
-------------------------------
Total other income 2,695 2,789
-------------------------------
OTHER EXPENSES
Salaries and employee benefits 3,378 3,249
Net occupancy expenses 480 440
Data processing and equipment expenses 498 488
Other expenses 1,699 1,625
-------------------------------
Total other expenses 6,055 5,802
-------------------------------
INCOME BEFORE INCOME TAX 1,983 2,497
Income tax expense 466 773
-------------------------------
Net Income $ 1,517 $ 1,724
===============================
BASIC EARNINGS PER SHARE $ .51 $.58
DILUTED EARNINGS PER SHARE $ .49 $.56
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, 2003 $1,041 $20,994 $37,638 $2,075 $(15,525) $46,223
Net income $1,517 1,517 1,517
Other comprehensive
income, net of tax,
unrealized gains on
securities 1,586 1,586 1,586
--------
Comprehensive income $3,103
========
Exercise of stock options 2 96 98
Tax benefit related to
stock options 46 46
Cash dividends ($.12 per
share) (359) (359)
------------------ --------------------------------------------------
BALANCES, MARCH 31, 2004 $1,043 $21,136 $38,796 $3,661 $(15,525) $49,111
================== ==================================================
See notes to condensed consolidated financial statements.
4
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
THREE MONTHS ENDED
MARCH 31
----------------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,517 $ 1,724
Items not requiring (providing) cash
Provision for loan losses 246 375
Depreciation and amortization 372 363
Federal Home Loan Bank stock dividend (124)
Mortgage servicing rights recovery (93)
Deferred income tax 420 445
Investment securities amortization, net 113 129
Gain on sale of loans (548) (1,021)
Proceeds from sales of loans 29,649 76,806
Loans originated for sale (24,275) (67,006)
Gain on sale of other real estate owned (2)
Deferred loan fees 8 (3)
Unearned income (54) (102)
(Gain) loss on sale of fixed assets (3) 5
Increase in cash surrender value of life insurance (122)
Net change in
Interest receivable (401) 69
Interest payable (6) (122)
Other assets (226) 487
Other liabilities (999) (379)
----------------------------------
Net cash provided by operating activities 5,472 18,054
----------------------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 6,675 (165)
Purchases of securities available for sale (58,838) (45,653)
Proceeds from maturities, calls, and principal repayments of securities available for
sale 38,449 9,356
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (331)
Net change in loans (73,743) 37,618
Proceeds from sale of fixed assets 42
Recoveries on loans previously charged-off 88 77
Proceeds from sale of other real estate owned 17
Purchases of premises and equipment (473)
Purchase of bank owned life insurance (12,000)
----------------------------------
Net cash used in investing activities (99,783) (902)
----------------------------------
FINANCING ACTIVITIES
Net change in
Deposits 28,996 (10,654)
Short-term borrowings 27,880 (1,136)
Federal Home Loan Bank advance 35,000 15,200
Repayment of Federal Home Loan Bank advance (27,708) (26,600)
Proceeds from issuance of stock 144
Dividends paid (359) (317)
----------------------------------
Net cash provided by (used in) financing activities 63,953 (23,507)
----------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENT (30,358) (10,835)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692
----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,106 $ 24,857
==================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 4,235 $ 4,412
Income tax paid -- 535
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), and HBC Insurance Group, Inc. (Insurance Company). All intercompany
balances and transactions have been eliminated. The results of operations for
the periods ended March 31, 2004 and March 31, 2003 are not necessarily
indicative of the operating results for the full year of 2004 or 2003. The
accompanying unaudited condensed 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 2003 filed with the Securities and Exchange Commission.
The consolidated balance sheet of Horizon as of December 31, 2003 has been
derived from the audited balance sheet of Horizon as of that date.
In previous financial statements and reports, Horizon had consolidated a trust
through which it had issued trust preferred securities ("TPS") and reported the
TPS as "guaranteed preferred beneficial interests in Horizon Bancorp's
subordinated debentures" in the consolidated balance sheets. The Financial
Accounting Standards Board ("FASB") had previously issued FASB Interpretation
No. 46 ("FIN 46") and, in December 2003, issued a revision to FIN 46 to clarify
certain provisions which affected the accounting for TPS. As a result of the
provisions in FIN 46, the trust should be deconsolidated, with Horizon
accounting for its investment in the trust as an asset, its subordinated
debentures as debt, and the interest paid thereon as interest expense. Horizon
had always classified the TPS as debt and the dividends as interest but
eliminated its common stock investment and dividends received from the trust.
FIN 46 permits and encourages restatement of prior period results, and
accordingly, all financial information contained in this release has been
adjusted to give effect to the revised provisions of FIN 46. While these changes
had no effect on previously reported net interest margin, net income or earnings
per share, they increased total interest income and interest expense, as well as
total assets and total liabilities.
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. 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 2,990,989 and 2,974,050 for the
three-month period ended March 31, 2004 and 2003. The number of shares used in
the computation of diluted earnings per share is 3,115,635 and 3,068,941 for the
three month period ended March 31, 2004 and 2003. All share and per share
amounts have been adjusted for a three for two stock split declared October 21,
2003.
6
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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.
THREE MONTHS ENDED MARCH 31 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 1,517 $ 1,724
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (56) (49)
-----------------------------------------
Pro forma net income $ 1,461 $ 1,675
=========================================
Earnings per share:
Basic - as reported $ .51 $ .58
Basic - pro forma .49 .56
Diluted - as reported .49 .56
Diluted - pro forma .47 .55
------------------------------------------
NOTE 2-- INVESTMENT SECURITIES
2004
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $ 72,298 $ 425 $ (34) $ 72,689
State and municipal 55,873 3,505 (16) 59,362
Federal agency collateralized mortgage obligations 13,807 177 13,984
Federal agency mortgage backed pools 90,201 1,604 (94) 91,711
Corporate Notes 600 66 666
-----------------------------------------------------------------------
Total investment securities $ 232,779 $ 5,777 $ (144) $ 238,412
=======================================================================
7
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
2003
------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $ 66,945 $ 196 $ (369) $ 66,772
State and Municipal 57,799 2,482 (51) 60,230
Federal agency collateralized mortgage
obligations 14,354 176 (42) 14,488
Federal agency mortgage backed pools 72,806 747 (7) 73,546
Corporate notes 600 59 659
----------------------------------------------------------------------
Total investment securities $ 212,504 $ 3,660 $ (469) $ 215,695
======================================================================
The amortized cost and fair value of securities available for sale at March 31,
2004, 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 $ 997 $ 998
One to five years 68,922 67,814
Five to ten years 13,567 13,922
After ten years 45,285 49,983
------------------------------------
128,771 132,717
Federal agency collateralized mortgage obligations 13,807 13,984
Federal agency mortgage backed pools 90,201 91,711
------------------------------------
$ 232,779 $ 238,412
====================================
There were no sales of securities available for sale during the three
months ending MARCH 31, 2004 DECEMBER 31, 2003 March 31, 2004 or 2003.
NOTE 3 -- LOANS
MARCH 31, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 162,286 $ 152,362
Mortgage warehouse loans 173,084 126,056
Real estate loans 75,506 67,428
Installment loans 110,339 101,872
-----------------------------------
Allowance for loan losses 521,215 447,718
(6,951) (6,909)
-----------------------------------
Total loans $ 514,264 $ 440,809
==================================
8
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 4-- ALLOWANCE FOR LOAN LOSSES
MARCH 31, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of period $ 6,909 $ 6,255
Provision for losses, operations 246 1,350
Recoveries on loans 88 288
Loans charged off (292) (984)
-----------------------------------
Balances, end of period $ 6,951 $ 6,909
===================================
NOTE 5 -- NONPERFORMING ASSETS
MARCH 31, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 1,533 $ 1,707
Other real estate owned 332
-----------------------------------
Total nonperforming assets $ 1,865 $ 1,707
===================================
9
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 MONTHS ENDED MARCH 31, 2004
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.
OVERVIEW
For much of the first quarter, mortgage refinance activity was well below the
pace set throughout the first quarter of 2003. This caused a decrease in average
mortgage warehouse loans outstanding and a related decline in interest and fee
income generated by that category of lending. Growth in all other lending
categories was strong. The investment portfolio was increased by approximately
$20 million and $12 million of Bank Owned Life Insurance was purchased to
maintain earning asset levels.
Mortgage loan origination declined causing a decline in the gain on sale of
loans sold into the secondary market. Increases in other non-interest income
partially offset this decline.
Non-interest expense increased a modest 4% primarily related to new market
expansion. The effective tax rate declined due to additional tax exempt income.
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 38-42 of Form 10-K for 2003. Certain of these policies are
important to the portrayal of the Company's financial condition, since
10
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.
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 $6.951 million adequate to
cover losses inherent in the loan portfolio as of March 31, 2004. 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
three months ended March 31, 2004, cash and cash equivalents decreased by
approximately $30.4 million. These funds were used to increase loans outstanding
and to increase investment securities. At March 31, 2004, in addition to
liquidity provided from the normal operating, funding, and investing activities
of Horizon, the Bank has available approximately $123 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, 2003 to March 31, 2004.
Capital Resources
- -----------------
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at March 31, 2004. Stockholders' equity totaled
$49.111 million as of March 31, 2004 compared to $46.223 million as of December
31, 2003. The change in stockholders' equity during the three
11
months ended March 31, 2004 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
March 31, 2004, the ratio of stockholders' equity to assets was 5.97% compared
to 6.11% at December 31, 2003.
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 March 31, 2004.
There have been no other material changes in Horizon's capital resources from
December 31, 2003 to March 31, 2004.
Material Changes in Financial Condition - March 31, 2004 compared to
December 31, 2003
- --------------------------------------------------------------------
During the first three months of 2004, cash and cash equivalents decreased
approximately $30.4 million, investment securities increased approximately $23
million and loans outstanding increased approximately $73 million. The decrease
in cash and cash equivalents is related to decreases in deposited items in the
process of collection and overnight investments. The increased investments were
primarily short term, including callable 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. All lending
categories experienced growth during the quarter. Mortgage warehouse loans grew
late in the quarter as mortgage refinance activity picked up in March. Real
estate loans increased due to adjustable rate mortgages held in the Bank's
portfolio instead of being sold into the secondary market. Commercial loans
increased primarily in loans secured by commercial real estate and commercial
term loans with new customer relationships. Installment loan growth primarily
related to home equity second mortgage loans and indirect automobile loans.
Other assets increased due to the acquisition of Bank Owned Life Insurance.
Deposits increased approximately $29 million during the quarter. Non-interest
bearing deposits decreased primarily from corporate and public fund deposits
which moved to interest bearing categories. The growth in interest bearing
deposits, occurred primarily in NOW and Money Market Accounts offsetting a
decline in negotiable certificates of deposit.
Short term borrowings increased approximately $28 million to fund the growth
primarily in mortgage warehouse loans which are also short term in nature. FHLB
advances increased approximately $7 million to fund asset growth. This
additional debt is also short term in nature. 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, 2003 to March 31, 2004.
RESULTS OF OPERATIONS
Material Changes in Results of Operations - Three months ended March 31, 2004
compared to the three months ended March 31, 2003
- -----------------------------------------------------------------------------
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
12
During the three months ended March 31, 2004, net income totaled $1.517 million
or $.49 per diluted share compared to $1.724 million or $.56 per diluted share
for the same period in 2003.
Net interest income was $5.589 million for the three months ended March 31,
2004, compared to $5.885 million for the same period of 2003. The decrease was
the result of a decrease in net interest margin from 3.59% for the first quarter
of 2003 to 3.22% for the first quarter of 2004. This decline was the result of a
shift of earning assets from mortgage warehouse loans to the investment
portfolio. The investment portfolio averaged $235 million during the first
quarter of 2004 compared to $125 million during the same quarter of the prior
year. This growth was made possible by a decline in mortgage warehouse loans,
which averaged $117 million during the first quarter of 2004 compared to $237
million for the same quarter of the prior year. The decline in mortgage
warehouse loans was caused by the slow down in mortgage refinance activity.
Mortgage warehouse loans carried a higher yield than the investments, which
caused the compression in the net interest margin. Also effecting net interest
income was the investment of $12 million in Bank Owned Life Insurance early in
the first quarter of 2004. The income from this investment is treated as
noninterest income.
Total noninterest income was $2.695 million for the three months ended March 31,
2004 compared to $2.789 million for the same period in 2003. Gain on sale of
loans declined due to a reduction in mortgage origination volume as the total
loans sold during the first quarter declined from $51.4 million in 2003 to $23.1
million in 2004, a 55% decline. Partially offsetting the decline in gain on sale
of loans is increased income from the Bank Owned Life Insurance and commission
income from Horizon Insurance Services.
Noninterest expense increased $253 thousand for the three months ended March 31,
2004 compared to the same period in 2003. The majority of the increase relates
to staffing and facility expense for new offices opened since the first quarter
of 2003.
There have been no other material changes in the results of operations of
Horizon for the three months ending March 31, 2004 and 2003.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon currently does not engage in any derivative or hedging activity. Refer
to Horizon's 2003 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 2003 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 March 31,
2004, 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.
14
HORIZON BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2004
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
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
Horizon has posted its Code of Conduct for Executive Officers and Directors
and its Advisor Code of Conduct and Ethics on its web site at
www.accesshorizon.com
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-------------
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 January 23, 2004 to furnish the earnings
release issued by the Registrant on January 23, 2004 as required by
Item 12 of Form 8-K. No other reports on Form 8-K were filed during the
three months ended March 31, 2004.
15
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
May 10, 2004 /s/ Craig M. Dwight
- --------------------- -------------------------------------------
Date: BY: Craig M. Dwight
President and Chief Executive Officer
May 10, 2004 /s/ James H. Foglesong
- --------------------- -------------------------------------------
Date: BY: James H. Foglesong
Chief Financial Officer
16
INDEX TO EXHIBITS
The following documents are included as Exhibits to this Report.
Exhibit
- -------
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.
17