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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

Commission file number 0-10792

Horizon Bancorp

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 219-879-0211

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K  x

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant, based on the average bid price of such stock as of June 30, 2003, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $46,064,638.

As of March 17, 2004, the registrant had 2,995,014shares of Common Stock outstanding.

Documents Incorporated by Reference

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Horizon Bancorp

2003 Annual Report on Form 10-K

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PART I

ITEM 1. BUSINESS

General

Horizon Bancorp (“Horizon”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern Indiana and southwestern Michigan through its bank subsidiary, Horizon Bank, N.A. (the “Bank”). Horizon’s Common Stock is traded on the Nasdaq SmallCap Market under the symbol HBNC.

The Bank was chartered as a national bank association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, personal property and casualty insurance services and other services incident to banking. The Bank opened a new office in St. Joseph, Berrien County, Michigan in 2003. The Bank also has four offices in La Porte County, Indiana, three offices in Porter County, Indiana, and one office in Lake County, Indiana. At December 31, 2003, the Bank had total assets of $754,892,000 and total deposits of $547,090,000. The Bank has two wholly owned subsidiaries: Horizon Trust & Investment Management, N.A. (“Horizon Trust”) and Horizon Insurance Services, Inc. (“Horizon Insurance”).

Horizon has two nonbank subsidiaries, HBC Insurance Group, Inc. (the “Insurance Company”) and Horizon Statutory Trust 1 (“Horizon Trust”). The Insurance Company offers credit life and accident and health insurance. The net income generated from the Insurance Company is not significant to the overall operations of Horizon. Horizon Trust is a statutory business trust that was formed in 2002 to issue Trust Preferred Capital Securities. The business of Horizon, the Bank, Horizon Trust, Horizon Insurance and Insurance Company is not seasonal to any material degree.

No material part of Horizon’s business is dependent upon a single or small group of customers, the loss of any one or more of whom would have a materially adverse effect on the business of Horizon. In 2003, revenues from loans accounted for 66% of the total consolidated revenue. For the same year, revenues from investment securities accounted for 13% of total consolidated revenue.

Employees

The Bank, Horizon Trust and Horizon Insurance employed approximately 238 full and part-time persons as of December 31, 2003. Horizon does not have any employees.

Competition

A high degree of competition exists in all major areas where Horizon engages in business. The Bank’s primary market consists of La Porte and Porter County, Indiana, and Berrien County, Michigan. The Bank competes with commercial banks located in the home county and contiguous counties in Indiana and Michigan, as well as with savings and loan associations, consumer finance companies, and credit unions. To a more moderate extent, the Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services, and certain government agencies.

Based on deposits as of June 30, 2003, the Bank was the largest of the 11 bank and thrift institutions with offices in La Porte County with 31.1% of the deposits and the fifth largest of the 14 institutions with offices in Porter County with 5.9% of deposits. Horizon opened its first office in Berrien County, Michigan in 2003 and as of June 30, 2003, was the smallest of the 11 bank and thrift deposits in that county with less than 1%. (Source: FDIC Summary of Deposits Market Share Reports, available at www.fdic.gov).

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Supervision and Regulation

Horizon is registered as a bank holding company and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity.

The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts Horizon’s nonbanking activities to those which are determined by the Federal Reserve to be closely related to banking and a proper incident thereto.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.

Bank holding companies are required to comply with the Federal Reserve’s risk-based capital guidelines. The Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC”) have adopted risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. The Bank exceeded the risk-based capital requirements of the FDIC and OCC as of December 31, 2003. For Horizon’s regulatory capital ratios and regulatory requirements as of December 31, 2003, see the information in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below, which is incorporated herein by reference.

The Bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve, and the FDIC. The Bank’s deposits are insured up to $100,000 per insured account by the Bank Insurance Fund, which is administered by the FDIC.

Both federal and state law extensively regulates various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities, and other aspects of banking operations. Branching by the Bank is subject to the jurisdiction and requires notice to or the prior approval of the OCC.

Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate.

The FDICIA accomplished a number of sweeping changes in the regulation of depository institutions and their holding companies. The FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. The FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares, and such other standards as the agency deems appropriate.

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On November 12, 1999, the President signed into law comprehensive legislation that modernizes the financial services industry for the first time in decades. The Gramm-Leach-Bliley Act (“GLBA”) permits bank holding companies to conduct essentially unlimited securities and insurance activities, in addition to other activities determined by the Federal Reserve to be related to financial services. As a result of the GLBA, Horizon may underwrite and sell securities and insurance. It may acquire, or be acquired by, brokerage firms and insurance underwriters. Horizon does not anticipate significant changes in its products or services as a result of the GLBA.

On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the “Patriot Act”). The Patriot Act is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934 (the “1934 Act”). In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Management expects that significant additional efforts and expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.

The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) was signed into law by President Bush on December 4, 2003. The FACT Act amends the Fair Credit Reporting Act and makes permanent certain federal preemptions that form the basis for a national credit reporting system. The FACT Act is also intended to (i) address identity theft, (ii) increase access to credit information, (iii) enhance the accuracy of credit reporting, (iv) facilitate the opt-out by consumers from certain marketing solicitations, (v) protect medical information, and (vi) promote financial literacy. The statute will affect credit reporting agencies (commonly referred to as “credit bureaus”), financial institutions, other users of credit reports and those who furnish information to credit bureaus. Management does not anticipate that this legislation will have a significant adverse effect on our business.

In addition to the matters discussed above, Horizon’s affiliate bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit, and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the United States government and its various agencies, particularly the Federal Reserve.

Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures, and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or Horizon and its affiliate bank in particular would be affected.

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BANK HOLDING COMPANY STATISTICAL DISCLOSURES

Information required by this section of Securities Act Industry Guide 3 is presented in Management ‘s Discussion and Analysis as set forth in item 7 below, herein incorporated by reference.

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis.

Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded 10% of the consolidated stockholders’ equity of Horizon at December 31, 2003.

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The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)

LOAN PORTFOLIO (continued)

The increase in nonaccrual loans in 2003 is primarily due to increases in consumer loans of $89 thousand, mortgage loans of $254 thousand and commercial loans of $146 thousand. The decrease in nonaccrual loans in 2002 is primarily due to a decrease in commercial loans of $868 thousand partially offset by an increase in mortgage loans of

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$340 thousand. The decrease in nonaccrual loans in 2001 is primarily due to a decrease in nonaccrual mortgage loans of $637 thousand. The increase in nonaccrual loans in 2000 is primarily due to the increase in nonaccrual mortgage loans of $842 thousand and increase in nonaccrual commercial loans of $321 thousand.

Discussion of Nonaccrual Policy

From time to time, the Bank obtains information, which may lead management to believe that the collection of interest may be doubtful on a particular loan. In recognition of such, it is management’s policy to convert the loan from an “earning asset” to a nonaccruing loan. Further, it is management’s policy to place a commercial loan on a nonaccrual status when delinquent in excess of 90 days, unless the Loan Committee approves otherwise. The officer responsible for the loan, the senior lending officer and the senior collections officer must review all loans placed on nonaccrual status. The senior collections officer monitors the loan portfolio for any potential problem loans.

Impaired loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $314,621 and $162,741 at December 31, 2003 and 2002, respectively. The allowance for impaired loans, included in the Bank’s allowance for loan losses totaled $62,000 and $25,000 at those respective dates. The average balance of impaired loans during 2003 and 2002 was $320,925 and $585,490, respectively.

None

As of December 31, 2003, there are no significant concentrations of loans exceeding 10% of total loans other than those disclosed in Item III(a) above.

There are no other interest-bearing assets as of December 31, 2003, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans.

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Allocation of the Allowance for Loan Losses at December 31 (thousands)

In 1999, Horizon began a mortgage warehousing program. This program is described in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the Notes to the Financial Statements in Item 8 below, which are incorporated herein by reference. The greatest risk related to these loans is transaction and fraud risk. During 2003 Horizon processed an average of almost $20 million per day in mortgage warehouse loans. During 2003 the lines of credit granted to customers increased from $438 million at December 31, 2002 to $459 million at December 31, 2003. Also with the decline in refinance activity a higher percentage of the mortgage warehouse loans are sub-prime which are assigned a higher reserve.

Information required by this section is found in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and related notes in Item 8 below, which are incorporated herein by reference.

Information required by this section is found in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and related notes in Item 8 below, which are incorporated herein by reference.

The following is a schedule of statistical information relative to securities sold under agreements to repurchase which are secured by U.S. Treasury and U.S. Government agency securities and mature within one year. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders’ equity at the end of the period.

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FORWARD-LOOKING STATEMENTS AND RISK FACTORS

A cautionary note about forward-looking statements: In its oral and written statements, Horizon from time to time includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations and expectations about Horizon’s financial and business performance as well as economic and market conditions. They often can be identified by the use of words like “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” or “anticipate.”

Horizon may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-K, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. It is intended that these forward-looking statements speak only as of the date they are made, and Horizon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events.

By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. You are cautioned that actual results may differ materially from those contained in the forward-looking statement. The discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 of this Form 10-K lists some of the factors that could cause Horizon’s actual results to vary materially from those expressed in or implied by any forward-looking statements. Your attention is directed to this discussion.

Other risks and uncertainties that could affect Horizon’s future performance include the effects of competition; technological changes; regulatory developments; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with Horizon’s business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in the securities markets. A decline in mortgage loan volume could also affect the performance of Horizon.

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ITEM 2. PROPERTIES

The main office of Horizon and the Bank is located at 515 Franklin Square, Michigan City, Indiana. The building located adjacent to the main office of Horizon and the Bank, at 502 Franklin Square, houses the credit administration, operations and information technology departments of the Bank. In addition to these principal facilities, the Bank has ten sales offices located at:

3631 South Franklin Street, Michigan City, Indiana

115 W. First St., Wanatah, Indiana

1500 Lincolnway, LaPorte, Indiana

423 South Roosevelt Street, Chesterton, Indiana

4208 N. Calumet, Valparaiso, Indiana

2650 Willowcreek Road, Portage, Indiana

2450 West Lincoln Highway, Merrillville, Indiana

811 Ship Street, St Joseph, Michigan

1808 East Bristol Street, Suite K, Elkhart, Indiana

Horizon owns all of the facilities, except for the Portage, Merrillville and Elkhart Indiana offices, which are leased from third parties.

ITEM 3. LEGAL PROCEEDINGS

No material pending legal proceedings, other than ordinary routine litigation incidental to the business to which Horizon or any of its subsidiaries is a party or of which any of their property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Horizon’s stockholders during the fourth quarter of the 2003 fiscal year.

SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information regarding Horizon’s common stock is included under the caption “Horizon’s Common Stock and Related Stockholders’ Matters” in Item 8 below, which is incorporated by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information required under this item is incorporated by reference to the information appearing under the caption “Summary of Selected Financial Data” in Item 8 of this Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

(Table Dollar Amounts in Thousands)

Overview

Horizon benefited in the first three quarters of 2003 from a very active mortgage refinance market. The benefit came primarily in two areas: mortgage loan origination and mortgage warehouse loans. Horizon originates mortgage loans for sale into the secondary market, generating a gain on sale. Refinancing activity created higher than normal volume of loans processed through the mortgage warehouse area generating interest and fee income on those loans. Numerous short term funding sources were utilized throughout the year to cover this abnormally high level of mortgage warehouse activity including FHLB debt, repurchase agreements and brokered certificates of deposit.

Total loans declined for the year due to fourth quarter fall-off in mortgage refinance activity and the related decline in mortgage warehouse loans. However, Horizon was successful in growing its core lending in local markets and in the newly developed Southwest Michigan market which generated almost one-half of the commercial loan growth.

Core deposits grew at a steady rate throughout the year particularly in certificates of deposit.

Critical Accounting Policies

Horizon has established various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation the Company’s financial statements. The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in Part II, Item 8 on Form 10-K. 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. Additional discussion regarding the allowance for loan loss is included in the following Analysis of Financial Condition and the notes to the consolidated financial statements.

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Analysis of Financial Condition

Investment Securities

Horizon maintains a high quality investment portfolio with low credit risk. Investment securities totaled $215,695 million at December 31, 2003 and consisted of U. S. Treasury and Government Agency securities of $66.772 million (31.0)%; Municipal securities of $60.230 million (27.9)%; Mortgage-Backed securities of $73.546 million (34.1)%; collateralized mortgage obligations of $14.488 million (6.7)%; and corporate securities of $659 thousand (0.3)%.

As indicated above, 40.8% of the investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage-backed securities and collateralized mortgage obligations have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2003, the mortgage-backed securities and collateralized mortgage obligations in the investment portfolio had an average life of 5.28 years. Securities that have interest rates above current market rates are purchased at a premium. These securities may experience a significant increase in prepayments when lower market interest rates create an incentive for the borrower to refinance the underlying mortgage. This may result in a decrease of current income, however, this risk is mitigated by a shorter average life. Management currently believes that prepayment risk on these securities is nominal.

At December 31, 2003 and 2002, all investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses added or subtracted, net of tax, directly to stockholders’ equity. This accounting method adds potential volatility to stockholders’ equity, but net income is not affected unless securities are sold. Net appreciation on these securities totaled $3.191 million, which resulted in a $2.075 million addition, net of tax, to stockholders’ equity at December 31, 2003. This compared to a $2.671 million, net of tax, addition in stockholders’ equity at December 31, 2002.

As a member of the Federal Reserve and Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of each entity. The investment in common stock is based on a predetermined formula. At December 31, 2003, Horizon has investments in the common stock of the Federal Reserve and Federal Home Loan Bank totaling $10.853 million compared to $8.329 million at December 31, 2002.

At December 31, 2003, Horizon does not maintain a trading account and is not using any derivative products for hedging or other purposes.

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Loans

Total loans, the principal earning asset of the Bank, were $447.718 million at December 31, 2003. The current level of loans is a decrease of 16.4% from the December 31, 2002 level of $535.793 million. As the table below indicates, the decrease is related to a decline in mortgage warehouse loans.

The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established rigorous underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements. The Bank uses an independent third-party loan review function that regularly reviews asset quality.

Real Estate Loans

Real estate loans totaled $67.428 million or 15.1% of total loans as of December 31, 2003, compared to $73.910 million or 13.8% of total loans as of December 31, 2002. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio.

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In addition to the customary real estate loans described above, the Bank also has outstanding on December 31, 2003, $28.013 million in home equity lines of credit compared to $17.015 million at December 31, 2002. Credit lines normally limit the loan to collateral value to no more than 89%. These loans are classified as consumer loans in the table above and in Note 3 of the consolidated financial statements.

Residential real estate lending is a highly competitive business. As of December 31, 2003, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows:

During 2003, and 2002 approximately $217 million and $177 million respectively of residential mortgages were originated for sale into the secondary market. These loan sales, also caused a decrease in the Bank’s portfolio of residential mortgage loans as a portion of portfolio loans were refinanced and sold into the secondary market. Horizon anticipates that the volume of mortgage loan activity will decline in 2004 as mortgage refinance activity subsides. This will negatively affect the gain on sale of loans, but should have little impact on mortgage loans outstanding.

In addition to the real estate loan portfolio, the Bank sells real estate loans and retains the servicing rights. Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances and number of loans serviced for others totaled approximately $148,359,000 and 1,846 and $102,409,000 and 1,582 at December 31, 2003 and 2002.

The Bank began capitalizing mortgage servicing rights during 2000 and the aggregate fair value of capitalized mortgage servicing rights at December 31, 2003 totaled approximately $1,133,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights.

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Commercial Loans

Commercial loans totaled $152.4 million or 34.0% of total loans as of December 31, 2003, compared to $111.897 million or 20.88% as of December 31, 2002. Approximately one half of this growth came in the Southwest Michigan market where Horizon began originating loans in February of 2003.

Commercial loans consisted of the following types of loans at December 31:

Consumer Loans

Consumer loans totaled $101,872 million or 22.8% of total loans as of December 31, 2003, compared to $81.534 million or 15.2% as of December 31, 2002. The total consumer loan portfolio increased 24.9% in 2003. The growth in consumer loans resulted from an increase in the number of automobile dealers from whom Horizon buys loans. Growth also came in home equity lines of credit through increased marketing and a more competitive product.

Mortgage Warehouse Loans

In November 1999, Horizon began a mortgage-warehousing program. Horizon enters into agreements with mortgage companies and purchases, at its discretion, mortgage loans from mortgage companies at par, net of certain fees, and later sells them back to the mortgage companies at the same amount and without recourse provisions. Interest income is recorded based upon a rate of interest tied to the prime rate during the funding period, not the rates on the individual note. Such loans are made to individuals and reviewed, prior to purchase, for evidence that the loans are of secondary market quality and meet Horizon’s internal underwriting guidelines. An assignment of the mortgage to Horizon is required. In addition, Horizon takes possession of the original note and forwards such note to the end investor. In the event that the end investor would not honor this commitment and the mortgage companies would not be able to honor their repurchase obligations, Horizon would then need to sell these loans in the secondary market at the fair value of these loans. Loans are typically resold within 30 days and are seldom held more than 90 days. If residential mortgage loan volume declines as anticipated, the level of these loans outstanding is anticipated to be below the average amounts attained for 2003 and 2002.

Allowance and Provision for Loan Losses/Critical Accounting Policy

An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. The identification of loans that may have potential losses is subjective, therefore, a general reserve is maintained to cover all potential losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor, and address asset quality problems, in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio. The methodology described above is consistent with the Office of the Comptroller of the Currency’s guidance in determining the adequacy of the allowance for loan losses.

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At December 31, 2003, the allowance for loan losses was $6.909 million or 1.54% of total loans outstanding, compared to $6.255 million or 1.17% at December 31, 2002. During 2003, the provision for loan losses totaled $1.350 million compared to $1.625 million in 2002. The allowance as a percent of total loans increased due to the decline in total loans and is somewhat above peers. This increase is justified as the mix of the loan portfolio shifted away from residential mortgage loans to a higher concentration of commercial and consumer loans which traditionally carry a higher degree of risk. However, no assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be adequate to cover losses inherent in the loan portfolio as of December 31, 2003.

Nonperforming Loans

Nonperforming loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning nonperforming loans to an earning asset basis. Nonperforming loans for the previous three years ending December 31 are as follows:

Nonperforming loans total 27% of the allowance for loan losses at December 31, 2003 compared to 21% and 35% of the allowance for loan losses on December 31, 2002 and 2001, respectively.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 4 family residences, residential construction loans, automobile, home equity, second mortgage loans, and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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Other real estate owned (OREO) net of any related allowance for OREO losses for the previous three years ending December 31 are as follows:

Deposits

The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank when it can do so at interest rates and terms that are superior to those required for deposited funds. Total deposits were $546.168 million at December 31, 2003 compared to $489.259 million at December 31, 2002 or an increase of 11.6%. Average deposits and rates by category for the pervious three years ended December 31 are as follows: