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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, 2004
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 FRANKLIN SQUARE, MICHIGAN CITY, 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:
3,001,122 at August 5, 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)
JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
----------- ----
ASSETS
Cash and due from banks $ 20,842 $ 28,434
Interest-bearing demand deposits 1 30
Federal funds sold 17,000
--------- ---------
Cash and cash equivalents 20,843 45,464
Interest-bearing deposits 2,000 9,135
Investment securities, available for sale 219,501 215,695
Loans held for sale 1,910 8,213
Loans, net of allowance for loan losses of $6,976 and $6,909 510,487 440,809
Premises and equipment 16,732 16,460
Federal Reserve and Federal Home Loan Bank stock 11,089 10,853
Interest receivable 3,696 3,769
Other assets 20,021 7,045
--------- ---------
Total assets $ 806,279 $ 757,443
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 68,677 $ 71,157
Interest bearing 524,262 475,011
--------- ---------
Total deposits 592,939 546,168
Short-term borrowings 36,908 20,241
Federal Home Loan Bank advances 113,204 125,972
Subordinated debentures 12,372 12,372
Interest payable 750 751
Other liabilities 4,814 5,716
--------- ---------
Total liabilities 760,987 711,220
--------- ---------
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, 4,726,158 and 4,684,095 shares 1,050 1,041
Additional paid-in capital 21,582 20,994
Retained earnings 40,243 37,638
Accumulated other comprehensive income (loss) (1,210) 2,075
Less treasury stock, at cost, 1,732,486 and 1,698,881 shares (16,373) (15,525)
--------- ---------
Total stockholders' equity 45,292 46,223
--------- ---------
Total liabilities and stockholders' equity $ 806,279 $ 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 JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
INTEREST INCOME
Loans receivable $ 8,505 $ 8,739 $15,927 $17,250
Investment securities
Taxable 1,709 1,009 3,545 2,289
Tax exempt 560 512 1,133 900
------- ------- ------- -------
Total interest income 10,774 10,260 20,605 20,439
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,602 2,412 5,209 4,996
Federal funds purchased and short-term borrowings 106 107 180 180
Federal Home Loan Bank advances 1,416 1,603 2,819 3,086
Subordinated debentures 139 153 297 307
------- ------- ------- -------
Total interest expense 4,263 4,275 8,505 8,569
------- ------- ------- -------
NET INTEREST INCOME 6,511 5,985 12,100 11,870
Provision for loan losses 228 375 474 750
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,283 5,610 11,626 11,120
------- ------- ------- -------
OTHER INCOME
Service charges on deposit accounts 745 804 1,501 1,430
Fiduciary activities 697 631 1,335 1,187
Commission income from insurance agency 86 78 273 135
Income from reinsurance company 14 15 14 29
Gain on sale of loans 395 1,190 943 2,211
Loss on sale of securities (6) (6)
Other income 533 346 1,099 861
------- ------- ------- -------
Total other income 2,470 3,058 5,165 5,847
------- ------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 3,557 3,455 6,935 6,704
Net occupancy expenses 441 431 921 871
Data processing and equipment expenses 491 535 989 1,023
Other expenses 1,814 1,734 3,513 3,359
------- ------- ------- -------
Total other expenses 6,303 6,155 12,358 11,957
------- ------- ------- -------
INCOME BEFORE INCOME TAX 2,450 2,513 4,433 5,010
Income tax expense 647 738 1,113 1,511
------- ------- ------- -------
Net Income $ 1,803 $ 1,775 $ 3,320 $ 3,499
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ .60 $ .59 $ 1.11 $ 1.17
DILUTED EARNINGS PER SHARE $ .58 $ .57 $ 1.06 $ 1.13
See notes to condensed consolidated financial statements.
3
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Table Dollar Amounts in Thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME (LOSS) STOCK TOTAL
----- ------- ------ -------- ------------- ----- -----
BALANCES, DECEMBER 31, 2003 $1,041 $20,994 $37,638 $ 2,075 $(15,525) $46,223
Net income $ 3,320 3,320 3,320
Other comprehensive income, net of
tax, unrealized losses on
securities (3,285) (3,285) (3,285)
-------
Comprehensive income $ 35
=======
Exercise of stock options 9 363 372
Tax benefit related to stock
options 225 225
Purchase treasury stock (848) (848)
Cash dividends ($.24 per share) (715) (715)
------ ------- ------- ------- -------- -------
BALANCES, JUNE 30, 2004 $1,050 $21,582 $40,243 $(1,210) $(16,373) $45,292
====== ======= ======= ======= ======== =======
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
------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income $ 3,320 $ 3,499
Items not requiring (providing) cash
Provision for loan losses 474 750
Depreciation and amortization 728 743
Federal Home Loan Bank stock dividend (236) (104)
Mortgage servicing rights (recovery) impairment (53) 148
Deferred income tax 726 (655)
Investment securities amortization, net 260 639
Gain on sale of loans (943) (2,211)
Proceeds from sales of loans 55,265 146,592
Loans originated for sale (48,019) (136,688)
Gain on sale of other real estate owned (2)
Deferred loan fees 18 (17)
Unearned income (120) (193)
Loss on sale of securities 6
Loss on sale of fixed assets 3 4
Increase in cash surrender value of life insurance (122)
Net change in
Interest receivable 73 62
Interest payable (1) (160)
Other assets 226 694
Other liabilities (902) 237
-------- ---------
Net cash provided by operating activities 10,695 13,346
-------- ---------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 7,135 (215)
Purchases of securities available for sale (69,638) (94,868)
Proceeds from maturities, calls, and principal repayments of securities available for sale 60,519 33,575
Proceeds from sale of securities 16,313
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (1,326)
Net change in loans (70,218) (23,811)
Proceeds from sale of fixed assets 42
Recoveries on loans previously charged-off 168 147
Proceeds from sale of other real estate owned 17
Purchases of premises and equipment (1,045) (637)
Purchase of bank owned life insurance (12,000)
-------- ---------
Net cash used in investing activities (85,020) (70,822)
-------- ---------
FINANCING ACTIVITIES
Net change in
Deposits 46,771 183
Short-term borrowings 16,667 23,843
Federal Home Loan Bank advance 48,300 102,998
Repayment of Federal Home Loan Bank advance (61,068) (71,632)
Proceeds from issuance of stock 597
Purchase of treasury stock (848) 119
Dividends paid (715) (634)
-------- ---------
Net cash provided by financing activities 49,704 54,877
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (24,621) (2,599)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,843 $ 33,093
======== =========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 8,506 $ 8,720
Income tax paid 150 1,600
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 June 30, 2004 and June 30, 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 report 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 2,987,483 and 2,974,607 for the
six-month period ended June 30, 2004 and 2003. The number of shares used in the
computation of diluted earnings per share is 3,119,636 and 3,089,352 for the six
month period ended June 30, 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)
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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 JUNE 30 2004 2003
-------------------------- ---- ----
Net income, as reported $ 1,803 $ 1,775
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (34) (14)
------- -------
Pro forma net income $ 1,769 $ 1,761
======= =======
Earnings per share
Basic - as reported $ .60 $.59
Basic - pro forma .59 .59
Diluted - as reported .58 .57
Diluted - pro forma .57 .57
SIX MONTHS ENDED JUNE 30 2004 2003
------------------------ ---- ----
Net income, as reported $ 3,320 $ 3,499
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (90) (65)
------- -------
Pro forma net income $ 3,230 $ 3,434
======= =======
Earnings per share
Basic - as reported $ 1.11 $1.17
Basic - pro forma 1.08 1.15
Diluted - as reported 1.06 1.13
Diluted - pro forma 1.04 1.11
NOTE 2 -- INVESTMENT SECURITIES
2004
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30 COST GAINS LOSSES VALUE
------- ---- ----- ------ -----
Available for sale
U. S. Treasury and federal agencies $ 62,252 $ 7 $ (1,376) $ 60,883
State and municipal 54,993 1,222 (713) 55,502
Federal agency collateralized mortgage obligations 13,050 28 (76) 13,002
Federal agency mortgage backed pools 87,568 410 (1,391) 86,587
Corporate Notes 3,500 27 3,527
--------- ---------- ---------- --------
Total investment securities $ 221,363 $ 1,694 $ (3,556) $219,501
========= ========== ========== ========
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 June 30,
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 $ 8,105 $ 8,105
One to five years 54,075 53,118
Five to ten years 14,273 14,132
After ten years 44,292 44,557
--------- ---------
120,745 119,912
Federal agency collateralized mortgage obligations 13,050 13,002
Federal agency mortgage backed pools 87,568 86,587
--------- ---------
$ 221,363 $ 219,501
========= =========
Realized net gains and (losses) on the sale of securities available for sale are
summarized as follows:
FOR THE PERIOD ENDED JUNE 30, 2003
----------------------------- ----
Realized gains $ 93
Realized losses (99)
------
Net realized losses $ (6)
======
There were no sales of securities available for sale during the six months
ending June 30, 2004.
8
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS
JUNE 30, DECEMBER
2004 31, 2003
---- --------
Commercial loans $ 175,237 $ 152,362
Mortgage warehouse loans 131,795 126,056
Real estate loans 90,505 67,428
Installment loans 119,926 101,872
--------- ---------
517,463 447,718
Allowance for loan losses (6,976) (6,909)
--------- ---------
Total loans $ 510,487 $ 440,809
========= =========
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
JUNE 30, DECEMBER
2004 31, 2003
---- --------
Allowance for loan losses
Balances, beginning of period $ 6,909 $ 6,255
Provision for losses, operations 474 1,350
Recoveries on loans 168 288
Loans charged off (575) (984)
--------- ---------
Balances, end of period $ 6,976 $ 6,909
========= =========
NOTE 5 -- NONPERFORMING ASSETS
JUNE 30, DECEMBER
2004 31, 2003
---- --------
Nonperforming loans $ 1,599 $ 1,707
Other real estate owned 339
--------- ---------
Total nonperforming assets $ 1,938 $ 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 AND SIX MONTHS ENDED JUNE 30, 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 the first six months of the current year, average earning assets increased
in all categories except mortgage warehouse loans. In addition, $12 million of
Bank Owned Life Insurance was purchased which is shown on the balance sheet as
part of other assets. Average mortgage warehouse loans, while stronger than
anticipated in the second quarter of 2004, declined from 2003 levels due to an
overall decline in mortgage refinance activity.
The growth in earning assets caused an increase in net interest income despite a
decline in net interest margin.
The decline in mortgage loan refinance activity caused a reduction in the gain
on sale of loans, sold into the secondary market.
Noninterest expense increased a modest 2.4% 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 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 $6.976 million adequate to
cover losses inherent in the loan portfolio as of June 30, 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 six
months ended June 30, 2004, cash and cash equivalents decreased by approximately
$24.6 million. These funds were used to increase loans outstanding and to
increase investment securities. At June 30, 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 June 30, 2004.
11
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at June 30, 2004. Stockholders' equity totaled
$45.292 million as of June 30, 2004 compared to $46.223 million as of December
31, 2003. The change in stockholders' equity during the six months ended June
30, 2004 is the result of net income, net of dividends declared, a decrease in
the market value of investment securities available for sale, purchase of
treasury stock and the issuance of new shares related to the exercise of stock
options. At June 30, 2004, the ratio of stockholders' equity to assets was 5.62%
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 June 30, 2004.
There have been no other material changes in Horizon's capital resources from
December 31, 2003 to June 30, 2004.
Material Changes in Financial Condition - June 30, 2004 compared to December 31,
2003
During the first six months of 2004, cash and cash equivalents decreased
approximately $24.6 million, and loans outstanding increased approximately $69.7
million. The decrease in cash and cash equivalents is related to decreases in
deposited items in the process of collection and overnight investments. All
lending categories experienced growth during the quarter. 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
loans and indirect automobile loans. Other assets increased due to the
acquisition of Bank Owned Life Insurance.
Deposits increased approximately $46.8 million during the first six months of
2004. Noninterest 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 Money Market Accounts and short-term
brokered Certificates of Deposit acquired to fund mortgage warehouse activity
which surged for a short time during the second quarter of 2004.
Short-term borrowings increased approximately $16.7 million to fund the growth
in total loans outstanding. FHLB advances decreased approximately $12.8 million
due the maturity of short-term advances. 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 June 30, 2004.
RESULTS OF OPERATIONS
Material Changes in Results of Operations - Six months ended June 30, 2004
compared to the six months ended June 30, 2003
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
12
During the six months ended June 30, 2004, net income totaled $3.320 million or
$1.06 per diluted share compared to $3.499 million or $1.13 per diluted share
for the same period in 2003.
Net interest income was $12.100 million for the six months ended June 30, 2004,
compared to $11.870 million for the same period of 2003. The increase was the
result of an increase in average earning assets from $677 million in 2003 to
$742 million for the first six months of 2004. The investment portfolio
increased approximately $65 million from the same period of the prior year,
primarily in callable agency securities, mortgage backed securities and tax
exempt municipal securities. Average loans outstanding decreased to $494 million
from $510 million for the first six months of 2003. A decline in average
mortgage warehouse loans to $142 million during the first six months of 2004
from $239 million during the first six months of the prior year was partially
offset by growth in the other loan categories. The net interest margin declined
to 3.33% for the first six months of 2004 compared to 3.60% for the first six
months of 2003. The increase in the investment portfolio was at lower yields,
which caused a decline in net interest margin but had a positive impact on net
interest income. Also effecting net interest income was the investment of $12
million in Bank Owned Life Insurance early in 2004. The income from this
investment is treated as noninterest income.
Total noninterest income was $5.165 million for the six months ended June 30,
2004 compared to $5.847 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 six months declined from $112.6 million in 2003 to
$46.8 million in 2004, a 58% 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 $401 thousand for the six months ended June 30,
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 second half of
2003.
There have been no other material changes in the results of operations of
Horizon for the six months ending June 30, 2004 and 2003.
Material Changes in Results of Operations - Three months ended June 30, 2004
compared to the three months ended June 30, 2003
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 June 30, 2004, net income totaled $1.803 million
or $.58 per diluted share compared to $1.775 million or $.57 per diluted share
for the same period in 2003.
Net interest income was $6.511 million for the three months ended June 30, 2004,
compared to $5.985 million for the same period 2003. The increase was the result
of an increase in average earning assets to approximately $771 million, an
increase of approximately $85 million over the same period of 2003. This is
partly offset by a decline in net interest margin of 14 basis points to 3.45%
for the three months ended June 30, 2004 compared to the same period of 2003.
The increase in the investment portfolio was at lower yields, which caused a
decline in net interest margin.
The provision for loan losses totaled $228 thousand for the three months ended
June 30, 2004 compared to $375 thousand for the same period of the prior year.
The allowance for loan losses to total loans is 1.35% at June 30, 2004 compared
to 1.54% at December 31, 2003.
Total noninterest income was $2.470 million for the three months ended June 30,
2004, compared to $3.058 million for the same period in 2003. This decrease
relates primarily to a
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decrease in gain on the sale of loans into the secondary market. During the
three months ended June 30, 2004, the gain on sale of mortgage loans totaled
$395 thousand based on the sale of approximately $23.7 million of mortgage
loans. This compares to a gain of $1.190 million based on the sale of
approximately $61.2 million in the same period of the prior year.
Noninterest expense increased $148 thousand or 2.4% for the three months ended
June 30, 2004 compared to the same period in 2003. The increase relates to
staffing and facility expense for new offices opened during the second half of
2003, which were partially offset by cost containment efforts.
There have been no other material changes in the results of operations of
Horizon for three months ending June 30, 2004 and 2003.
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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 June 30,
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.
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HORIZON BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2004
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information with respect to purchases ohe Company
made of its Common Stock during the quarter ended June 30, 2004:
TOTAL NUMBER OF NUMBER OF
TOTAL SHARES PURCHASED SHARES THAT MAY
NUMBER OF AS PART OF PUBLICLY YET BE PURCHASED
SHARES AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLAN OR
PURCHASED PAID PER SHARE OR PROGRAMS PROGRAM
--------- -------------- ----------- -------
April 1, 2004 through April 30, 2004 -- $ -- -- --
May 1, 2004 through May 31, 2004 30,000 (1) 25.38 -- --
June 1, 2004 through June 30, 2004 3,605 (2) 24.08 -- --
(1) The 30,000 shares redeemed were not part of a publicly announced repurchase
plan or program. As previously reported in the Company's Current Report on
Form 8-K, dated May 6, 2004, these shares were repurchased from a
shareholder in a single negotiated transaction.
(2) The 3,605 shares redeemed were not part of a publicly announced repurchase
plan or program. These shares were owned and tendered by employees to
Horizon as payment for taxes associated with option exercises.
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 6, 2004.
(b) The names of the Directors elected at the Annual Meeting were as follows:
Name Votes For Votes Withheld
---- --------- --------------
Susan D. Aaron 2,265,620 79,873
Charley E. Gillispie 2,281,032 64,461
Larry N. Middleton, Jr. 2,267,689 77,803
Robert E. Swinehart 2,277,552 67,947
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(c) Ratification of BKD, LLP as independent accountants.
Votes for 2,335,802
Votes against 648
Votes abstained 9,043
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 April 26, 2004 to furnish the earnings release
issued by the Registrant on April 23, 2004 as required by Item 12 of
Form 8-K.
A Form 8-K was filed on May 6, 2004, to furnish information regarding
the repurchase of Horizon Bancorp stock from Chairman of the Board,
Robert C. Dabagia.
No other reports on Form 8-K were filed during the three months ended
June 30, 2004.
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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
August 5, 2004 /s/ Craig M. Dwight
- -------------- ---------------------------------------------
Date BY: Craig M. Dwight
President and Chief Executive Officer
August 5, 2004 /s/ James H. Foglesong
- -------------- ---------------------------------------------
Date BY: James H. Foglesong
Chief Financial Officer
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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.
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