The Future of Every Child
HORIZON BANCORP
CORPORATE HEADQUARTERS
515 FRANKLIN SQUARE
MICHIGAN CITY, IN 46360
toll-free888-873-2640
www.accesshorizon.com
A NASDAQ Traded Company - Symbol HBNC
HORIZON BANCORP
ANNUAL REPORT 2001
At Horizon, we know of no greater return-on-investment than the dividends
resulting from time and energy spent with the children of our community. "The
Future of Every Child" relates to the importance of our children and
grandchildren, and offers a compelling reason to continue striving toward
dynamic enhancements in our local community. As 2002 progresses, Horizon
continues its commitment to excellence as an independent community bank, and as
a company built on values. It is in this light that we proudly present the theme
of this report, "The Future of Every Child," as a celebration of our most
cherished and valuable assets.
Table of Contents
Message to Shareholders .....................................................3
Shareholder Value Plan ......................................................4
Summary of Financial Results ................................................6
Management Discussion and Analysis ..........................................9
Financial Statements .......................................................23
Board of Directors, Executive Officers & Shareholder Relations .............48
Subsidiaries ...............................................................49
(cover, from left to right) Ayanna Campbell, Madilyn Kazmucha, Kane Neff, Shelby
Bourge, Ivan Bourge & Patrick Derr (left page) Rylee Penziol (above) Kayla
Atkinson & Nick Ruhe
1
[PHOTO]
2
Message to Shareholders
Dear Shareholders,
We are pleased to report Horizon Bancorp achieved record earnings for the second
consecutive year. Net income for twelve months ended December 31, 2001, totaled
$4.125 million, or $2.08 per share, compared to net income in 2000 of $3.783
million, or $1.85 per share. This represents a 12.43 percent increase over the
prior year's earnings per share and a 9.04 percent increase in net income.
Our accomplishments in the challenging economic circumstances of 2001 are
attributable to disciplined, rational pricing in a rapidly declining interest
rate market, growth in earning assets, record mortgage loan volume, and several
improved operational efficiencies. During the year we completed a major data
processing system conversion for the benefit of customers and the Company,
relocated our insurance agency from a stand alone office to sharing space with
the Bank, entered into an agreement to sell excess real estate, closed an
unprofitable branch office, and introduced full service online banking. These
activities were handled extremely well and accomplished while our operational
teams continued to handle their daily tasks. In addition, according to the June
30, 2001, Federal Deposit Insurance Corporation's annual deposit report, Horizon
gained market share in our primary markets of LaPorte and Porter Counties,
Indiana, for the third consecutive year.
The quality of our loan portfolios continues to be one of our major strengths.
Net loan charge-offs during the year amounted to only 0.18 of 1 percent of
average loans outstanding, which is better than the average of our peers and
below national averages. Our lending team continues to make asset quality a
priority.
As you know, Horizon Bancorp is a value driven company. Among our many values,
enhancing the interests of our shareholders was the object of considerable
attention during 2001. Your Board of Directors approved the Shareholder Value
Plan which calls for improving communications with shareholders, increasing the
number of shares outstanding by splitting the shares 3 for 1, and improving the
marketability of our shares with a listing on NASDAQ SmallCap Market before the
end of the year. The results to date are gratifying.
On December 31, 2001, three long-time Directors retired from our Board. Mr.
Boyd W. Phelps, Mr. Russell L. Arndt, and Mr. James D. Brown have served our
company and community with distinction throughout their tenures. We thank them
for their years of dedication and loyalty to Horizon Bancorp, and look forward
to their continued friendship and support.
On behalf of the entire Horizon Bancorp family, our thanks to you for your
continued support and confidence.
Robert C. Dabagia Craig M. Dwight
Chairman President & Chief Executive Officer
[PHOTO](opposite page) Megan & Paige Nilson (above) Charles Trowbridge
3
Shareholder Value Plan
The year 2001 saw the dynamic implementation of many new systems and programs at
Horizon Bancorp, the most bold and innovative of which was the Shareholder Value
Plan. A four-phase initiative launched in October, the Shareholder Value Plan is
a comprehensive strategic plan designed to buck the "mega-bank" trend, and to
help Horizon remain a leader in independent community banking.
Unanimously endorsed by the Board of Directors, the plan will allow the Bank to
broaden its shareholder base, to focus on local investors, and to remain
independent. Its four stages of implementation include: improved shareholder
communications, a 3 for 1 stock split, listing on NASDAQ SmallCap Market, and
the introduction of a dividend reinvestment plan.
Starting in January of 2001, Horizon increased the content of our quarterly
shareholder letter and began to issue informative press releases through
business wire services.
Phase two, a 3 for 1 stock split, was approved by the Board at its meeting on
Tuesday, October 16, 2001. Shareholders of record at the close of business on
October 31, 2001, received two additional shares for each one owned, increasing
the number of Horizon Bancorp shares outstanding from 661,900 to 1,985,700. The
split reaffirmed the Board's unwavering commitment to remain an independent
community bank by increasing the number of shares outstanding and providing an
affordable entry price for Horizon's stock.
By year-end, phase three of the plan was realized, as Horizon Bancorp proudly
gained a listing on NASDAQ SmallCap Market, trading under the symbol HBNC.
During 2002 the remaining phases will be implemented -- a dividend reinvestment
plan and
4
the option for shareholders to elect direct deposit of their dividend checks
into their bank account.
Horizon Bancorp now has approximately 1,000 shareholders, with 600 living in
Northwest Indiana or Southwest Michigan. The goal is to significantly increase
the percentage of local ownership by the end of 2003.
"We are a locally-owned, independent, community bank holding company, and we
intend to stay that way," said Horizon President and CEO Craig M. Dwight. "In
order to remain independent, we need to provide more liquidity for our stock at
a reasonable price and expand our local shareholder base," he continued, "and
the steps we are taking are designed to do just that."
As 2002 progresses, Horizon's Shareholder Value Plan will continue to provide an
affordable investment opportunity for local residents in Northwest Indiana.
Through the dividend reinvestment plan, Horizon shareholders will be able to
reinvest some or all of their dividends to purchase additional common shares and
will have the ability to make additional cash purchases. Dividend reinvestment
plans typically offer shareholders the opportunity to increase their ownership
of a company's stock at a lower cost than acquiring the stock through other
avenues.
Said Chairman Robert C. Dabagia, "We believe our dividend reinvestment plan will
encourage and promote purchases of our stock by local and regional residents who
have a vested interest in Horizon remaining an independent community bank. As we
have previously stated, we believe local ownership of our stock by individuals
with long-term investment objectives will be one of the keys to our continued
success."
5
HORIZON BANCORP AND SUBSIDIARIES
Summary of Financial Results
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
2001 2000 1999 1998 1997
------------------------------------------------------------------------------
Earnings
Net interest income $ 19,807 $ 18,654 $ 15,132 $ 14,517 $ 16,060
Provision for loan losses 1,505 2,010 1,100 820 1,255
Total noninterest income 9,521 6,856 5,882 5,453 4,919
Total noninterest expense 21,106 17,905 19,430 17,436 17,063
Provision for income taxes 2,592 1,812 675 460 664
------------------------------------------------------------------------------
Net income (loss) from
continuing operations 4,125 3,783 (191) 1,254 1,997
Loss, net of tax, from
discontinued operations (163) (171) (276)
------------------------------------------------------------------------------
Net income (loss) $ 4,125 $ 3,783 $ (354) $ 1,083 $ 1,721
------------------------------------------------------------------------------
Cash dividend declared $ 1,179 $ 1,228 $ 1,218 $ 1,237 $ 1,264
------------------------------------------------------------------------------
Per Share Data
Net income (loss) $ 2.08 $ 1.85 $ (.18) $ .53 $ .81
Cash dividends declared .60 .60 .60 .60 .60
Book value at period end 17.60 15.90 13.93 15.49 15.60
Weighted average share outstanding 1,985,458 2,048,649 1,966,173 2,060,412 2,132,901
Period End Totals
Loans, net of deferred
loan fees and unearned income $ 466,801 $ 393,578 $ 394,357 $ 290,346 $ 258,115
Allowance for loan losses 5,410 4,803 3,273 2,787 2,702
Total assets 587,945 531,776 525,996 416,154 359,751
Total deposits 419,599 386,348 363,668 322,401 264,413
Total borrowings 127,637 109,468 129,500 58,000 58,000
Ratios
Loan to deposit 111.25% 101.87% 108.44% 90.06% 97.62%
Loan to total funding 85.30 79.38 84.14 77.14 80.06
Return on average assets .76 .73 (.08) .29 .46
Average stockholders'
equity to average total assets 6.29 5.92 7.01 8.82 9.09
Return on average stockholders' equity 12.11 12.41 (1.13) 3.27 5.06
Dividend payout ratio
(dividends divided by net income) 28.85 32.43 (344.07) 114.25 73.45
Price to book value ratio 129.83 59.21 95.72 96.82 125.56
Price to earnings ratio 12.94 5.10 N/A 28.48 24.28
All share and per share amounts have been adjusted for the three-for-one stock
split declared October 16, 2001.
6
{GRAPH]
Net Income Excluding Non-Recurring Items
Net Income Excluding
Non-Recurring Items
Net income excluding
non-recurring items increased
$342,000 or 9% from 2000 to
2001. Non-recurring expense items
for 1999 include $2.1 million ESOP
termination expense.
Total Assets - Average Balances (dollars in millions)
Total Assets - Average Balances Total average assets increased $16.933 million
or 3.3% from
2000 to 2001. The growth came
primarily in Mortgage Warehouse
loans funded by growth in interest
bearing Transaction accounts.
During 2001 the Bank sold $35 million of
fixed rate mortgage loans 2001 to
reduce interest rate risk.
LaPorte County Deposit Market Share
LaPorte County Deposit Market
Share Horizon now covers 32% of
deposits in LaPorte County, up from
30% in 2000. This increase marks
the fourth consecutive year of
market share growth.
Porter County Deposit Market Share
Porter County Deposit Market Share Horizon first opened a branch in Porter
County in 1994.
Horizon now has three branches in
that County and has increased
market share every year since 1994.
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[PHOTO]
8
Management Discussion and Analysis
Analysis of Financial Condition. . . . . . . . . . . . . . . . . . . . . . . 10
Result of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Liquidity and Rate Sensitivity Management . . . . . . . . . . . . . . . . . 18
[PHOTO]
(opposite page) Kyra Risner (from left to right) Taylor Burhans, Noah Carter,
Matt, Gina & Sean Stevenson, Kaylee Jank & MacKenzie Veach
9
Analysis of Financial Condition
INVESTMENT SECURITIES
Horizon maintains a high quality investment portfolio with low credit risk.
Investment securities totaled $67.338 million at December 31, 2001, and
consisted of U.S. Treasury and Government Agency securities of $20.318 million
(30.2)%; Municipal securities of $15.310 million (22.7)%; Mortgage-backed
securities of $14.117 million (21.0)%; and collateralized mortgage obligations
of $17.593 million (26.1)%.
As indicated above, 47.1% 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 principal dollar is expected to be
outstanding. As of December 31, 2001, the mortgage-backed securities and
collateralized mortgage obligations in the investment portfolio had an average
life of 4.2 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, 2001 and 2000, 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 $710
thousand, which resulted in a $430 thousand addition, net of tax, to
stockholders' equity at December 31, 2001. This compared to a $9 thousand, net
of tax, addition in stockholders' equity at December 31, 2000.
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, 2001, Horizon has investments in the common stock of the Federal Reserve
and Federal Home Loan Bank totaling $6.738 million compared to $6.239 million
at December 31, 2000.
At December 31, 2001, Horizon does not maintain a trading account and is not
using any derivative products for hedging or other purposes.
LOANS
Total loans, the principal earning asset of the Bank, were $466.801 million at
December 31, 2001. The current level of loans is an increase of 18.6% from the
December 31, 2000, level of $393.578 million. As the table below indicates,
the increase is related to the growth in mortgage warehouse loans, partially
offset by a planned reduction of mortgage loans during 2001.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
10 HORIZON BANCORP & SUBSIDIARIES
DOLLAR PERCENT
DECEMBER 31 2001 2000 CHANGE CHANGE
- -------------------------------------------------------------------------------------------------------------------
Real estate loans
1 - 4 family $ 77,641 $ 123,136 $ (45,495) (36.95)%
Multi-family 41 246 (205) (83.33)
Other 2,889 2,049 840 41.00
===============================================
Total 80,571 125,431 (44,860) (35.76)
===============================================
Commercial loans
Working capital and equipment 60,260 67,969 (7,709) (11.34)
Real estate, including agriculture 27,812 11,151 16,661 149.41
Tax exempt 6,584 7,075 (491) (6.94)
Other 6,256 2,226 4,030 181.04
Total 100,912 88,421 12,491 14.13
===============================================
Consumer loans
Auto 20,664 12,249 8,415 68.70
Recreation 2,362 2,499 (137) (5.48)
Real estate/home improvement 33,937 36,221 (2,284) (6.31)
Home equity 13,305 11,883 1,422 11.97
Credit cards 4,227 4,751 (524) (11.03)
Unsecured 1,189 6,767 (5,578) (82.43)
Other 4,123 2,472 1,651 66.79
Total 79,807 76,842 2,965 3.86
===============================================
Mortgage warehouse loans
Prime 152,760 58,500 94,260 161.13
Sub-Prime 52,751 44,384 8,367 18.85
Total 205,511 102,884 102,627 99.75
===============================================
Grand total $ 466,801 $ 393,578 $ 73,223 18.60%
===============================================
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 engages an
independent third-party loan review function that regularly reviews asset
quality.
REAL ESTATE LOANS
Real estate loans totaled $80.571 million or 17% of total loans as of December
31, 2001, compared to $125.431 million or 32% of total loans as of December 31,
2000. 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.
In addition to the customary real estate loans described above, the Bank also
has outstanding on December 31, 2001, $13.305 million in home equity lines of
credit and $11.883 million at December 31, 2000. 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.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 11
Residential real estate lending is a highly competitive business. As of December
31, 2001, the real estate loan portfolio reflected a wide range of interest rate
and repayment patterns, but could generally be categorized as follows:
2001 2000
-----------------------------------------------------------------------------------------
PERCENT OF PERCENT OF
AMOUNT PORTFOLIO YIELD AMOUNT PORTFOLIO YIELD
-----------------------------------------------------------------------------------------
Fixed rate
Monthly payment $ 37,425 46.48% 7.10% $ 81,357 64.86% 7.41%
Biweekly payment 10,772 13.37 7.53 14,835 11.83 7.59
Adjustable rate
Monthly payment 32,095 39.80 6.99 28,933 23.07 8.05
Biweekly payment 279 .35 7.23 306 .24 8.93
========================== ==========================
Total $ 80,571 100.00% 7.11% $125,431 100.00% 7.54%
========================== ==========================
In addition to the real estate loan portfolio, the Bank sells real estate loans
and retains the servicing rights. On December 31, 2001, the portfolio serviced
consisted of 1,509 loans totaling $106.140 million. Total loans sold, servicing
retained, during 2001 totaled approximately $72 million.
COMMERCIAL LOANS
Commercial loans totaled $100.912 million or 21.6% of total loans as of
December 31, 2001, compared to $88.421 million or 22.6% as of December 31,
2000. Total commercial loans increased 14.1% in 2001.
Commercial loans consisted of the following types of loans at December 31:
2001 2000
----------------------------------------------------------------------------------------
PERCENT OF PERCENT OF
NUMBER AMOUNT PORTFOLIO NUMBER AMOUNT PORTFOLIO
----------------------------------------------------------------------------------------
SBA guaranteed loans 23 $ 4,186 4.15% 19 $ 2,379 2.69%
Municipal government 36 6,584 6.52 42 7,411 8.38
Lines of credit 175 18,216 18.05 172 23,310 26.36
Real estate and equipment
term loans 277 71,926 71.28 312 55,321 62.57
----------------------------------------------------------------------------------------
Total 511 $100,912 100.00% 545 $ 88,421 100.00%
----------------------------------------------------------------------------------------
CONSUMER LOANS
Consumer loans totaled $79,807 million or 17% of total loans as of December
31, 2001, compared to $76.842 million or 20% as of December 31, 2000. The
total consumer loan portfolio increased 3.9% in 2001.
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.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
12 HORIZON BANCORP & SUBSIDIARIES
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses represents Horizon's estimate of potential credit
losses associated with the loan portfolio. The identification of loans that may
have potential losses is necessarily 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, should they arise, 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 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.
At December 31, 2001, the allowance for loan losses was $5.410 million or 1.16%
of total loans outstanding, compared to $4.803 million and 1.22% at December 31,
2000. During 2001 the provision for loan losses totaled $1.505 million compared
to $2.010 million in 2000. The allowance as a percent of total loans declined
due to an increase in mortgage warehouse loans.
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:
2001 2000 1999
- --------------------------------------------------------------------------
Nonperforming loans $1,900 $3,186 $1,574
Nonperforming loans total 35% of the allowance for loan losses at December 31,
2001, compared to 66% and 48% of the allowance for loan losses on December 31,
2000 and 1999, 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.
Other real estate owned (OREO) net of any related allowance for OREO losses for
the previous three years ending December 31 are as follows:
2001 2000 1999
- ------------------------------------------------------------------------
Other real estate owned $538 $136 $0
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 13
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 $419.599 million at December 31, 2001, compared to $386.348 million at
December 31, 2000, or an increase of 8.6%. Below is a table of average
deposits and rates by category for the previous three years ended December 31.
AVERAGE BALANCE OUTSTANDING AVERAGE RATE PAID FOR THE YEAR
FOR THE YEAR ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Noninterest-bearing
demand deposits $ 41,915 $ 40,254 $ 43,258
Interest-bearing
demand deposits 94,186 67,853 45,679 1.55% 3.29% 2.45%
Savings deposits 37,909 38,536 45,358 1.53 2.21 1.77
Time deposits 227,270 247,254 203,180 5.54 5.91 5.25
-------------------------------------------
Total deposits $401,280 $393,897 $337,475
===========================================
In 1999 and 2000, Horizon revised and enhanced its interest-bearing consumer
and commercial demand deposit products. These product changes caused the
increases in the average balances as displayed in the table above.
Certificates of deposit of $100,000 or more, which are considered to be rate
sensitive and are not considered a part of core deposits, mature as follows as
of December 31, 2001:
Due in three months or less $10,480
Due after three months through six months 14,159
Due after six months through one year 6,498
Due after one year 14,197
$45,334
Interest expense on time certificates of $100,000 or more was approximately
$4,067,000, $6,557,000, and $4,067,000 for 2001, 2000, and 1999, respectively.
SHAREHOLDER VALUE PLAN
During 2001 Horizon initiated a Shareholder Value Plan. The Plan is a
comprehensive strategic plan to broaden and improve the market for Horizon's
common stock with local community investors who have a long-term, personal
interest in helping Horizon remain an independent community bank. It includes
improved communications with shareholders and customers as well as efforts to
improve the marketability of its common stock. During the fourth quarter, two
important components of the shareholder Value Plan were completed. These
included a three for one stock split and the listing of Horizon's stock on the
NASDAQ SmallCap Market. Prior to this Horizon's stock was traded on the
Bulletin Board. Horizon plans to implement additional stages of the
Shareholder Value Plan, including a dividend reinvestment plan, in early 2002.
RETIREMENT PLANS
On July 20, 1999, the Board of Directors of Horizon Bancorp authorized the
termination of the Horizon Bancorp Employee Stock Ownership Plan ("ESOP").
This decision was based upon a thorough financial analysis of the impact this
plan has had on the earnings and capital of Horizon since its inception and
the expected future impact retaining this plan would likely have on Horizon.
On December 31, 1999, the debt owed by the ESOP was repaid with the proceeds
from the sale of a portion of the unallocated shares to Horizon Bancorp. The
remaining shares for all active participants were allocated to participants.
The termination of the ESOP resulted
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
14 HORIZON BANCORP & SUBSIDIARIES
in an expense of $2.073 million for 1999. The remaining shares in the ESOP plan
were transferred to the Stock Bonus Plan.
Prior to Horizon's stock being listed on NASDAQ SmallCap, the market value of
the shares held in Horizon's Stock Bonus Plan was classified outside of
stockholders' equity due to these shares having a put option. The put option was
eliminated when the shares became readily marketable, thereby reclassifying the
Stock Bonus Plan equity to stockholders' equity at December 31, 2001.
The retirement plans of Horizon own approximately 19% of the outstanding shares
at December 31, 2001.
CAPITAL RESOURCES
The capital resources of Horizon and Bank exceed regulatory capital ratios for
"well capitalized" banks at December 31, 2001. Stockholders' equity totaled
$34.943 million as of December 31, 2001, compared to $31.624 million ($6.676
million from Stock Bonus Plan) as of December 31, 2000. At year-end 2001, the
ratio of stockholders' equity to assets was 5.94% compared to 5.95% for 2000.
Horizon's capital increased during the year 2001 as a result of increased
earnings, net of dividends declared, and the increase in the valuation allowance
for securities available for sale, net of treasury stock purchases. The growth
in assets offset the growth in equity, keeping the equity to asset ratio
approximately the same from 2000 to 2001.
The Board of directors at their February 19, 2002, meeting, approved the
formation of a statutory trust for the purpose of issuing trust preferred
securities through a pooled offering. The approved issuance should not exceed
$12 million. The trust will issue the preferred securities in amounts, terms,
and prices to be determined at the time of the offering. These securities will
be considered tier 1 equity by the regulatory agencies of the Bank and will
provide sufficient capital for continued growth.
Horizon paid dividends in the amount of $.60 per share in 2001, 2000, and 1999
adjusted for the three for one stock split declared in 2001. The dividend payout
ratio (dividends as a percent of net income) was 29% during 2001, 32% during
2000, and (344)% in 1999. For information regarding dividend restrictions, see
Note 1 of the Notes to the Consolidated Financial Statements.
As of December 31, 2001, management is not aware of any current recommendations
by banking regulatory authorities, which, if they were to be implemented, would
have or are reasonably likely to have a material effect on Horizon's liquidity,
capital resources, or operations.
Result of Operations
NET INCOME
Consolidated net income (loss) from continuing operations was $4.125 million or
$2.08 per share in 2001, $3.783 million or $1.85 per share in 2000 and $(191)
thousand or $(.10) per share in 1999. All per share information has been
adjusted to give effect for the three for one stock split declared October 16,
2001.
In April 1999, the Board of Directors of Horizon Bancorp approved discontinuing
the operations of The Loan Store, Inc., a wholly owned subsidiary of Horizon
Bancorp. On August 13, 1999, substantially all of the assets of The Loan Store,
Inc. were sold. Losses related to this subsidiary were $163 thousand or $.08 per
share in 1999.
NET INTEREST INCOME
The primary source of earnings for Horizon is net interest income. Net interest
income is the difference between what Horizon has earned on assets and the
interest paid on deposits and other funding sources. The net interest margin is
net interest income expressed as a percentage of average earnings assets.
Horizon's earning assets consist of loans, investment securities, and
interest-bearing balances in banks.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 15
2001 2000 1999
---------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing assets
Loans - total (1) (3) $426,821 $36,304 8.51% $400,524 $36,883 9.21% $306,142 $25,634 8.37%
Taxable investment
securities, including
FRB and FHLB stock 65,598 4,085 6.23 73,203 4,871 6.65 73,322 4,647 6.34
Nontaxable investment
securities (2) 2,635 114 4.33 280 13 4.64 3,417 167 4.89
Interest-bearing balances
and money market
investments (4) 733 34 5.37 636 33 5.19 943 43 4.56
Federal funds sold 6,626 240 3.62 2,413 153 6.34 8,375 406 4.85
-------- ------- ---- -------- ------- ---- ------- ------ ----
Total interest-bearing
assets 502,413 40,777 8.12 477,056 41,953 8.79 392,199 30,897 7.88
------- ------- -------
Noninterest-earning assets
Cash and due from banks 19,051 15,739 14,083
Allowance for loan losses (5,139) (4,048) (2,748)
Other assets 25,184 26,032 24,825
-------- -------- --------
Total assets $541,509 $514,779 $428,359
-------- -------- --------
Liabilities &
Stockholders' Equity
Interest-bearing
liabilities
Savings deposits $ 37,909 580 1.53 $ 38,536 853 2.21 $ 45,358 805 1.77
Interest-bearing
demand deposits 94,186 2,201 2.34 67,853 2,231 3.29 45,679 1,121 2.45
Time deposits 227,270 12,598 5.54 247,254 14,605 5.91 203,180 10,677 5.25
Short-term borrowings 23,061 925 3.55 10,996 612 5.57 1,173 76 6.48
Long-term debt 78,608 4,666 5.94 75,168 4,998 6.65 55,934 3,086 5.52
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 461,034 20,970 4.52 439,807 23,299 5.30 351,324 15,765 4.49
------- ------- -------
Noninterest-bearing
liabilities
Demand deposits 41,915 40,254 43,258
Other liabilities 4,487 4,236 3,615
Stockholders' equity 34,073 30,482 30,162
------ ------ ------
Total liabilities and
stockholders' equity
$541,509 $514,779 $428,359
-------- -------- --------
Net interest income $19,807 $18,654 $15,132
------- ------- -------
Net interest income as a percent
of interest-bearing assets 3.94% 3.91% 3.86%
---- ---- ----
(1) Nonaccruing loans for the purpose of the computations above are included in
the daily average loan amounts outstanding. Loan totals are shown net of
unearned income and deferred loans fees.
(2) Yields are not presented on a tax-equivalent basis.
(3) Loan fees and late fees included in interest on loans aggregated
$2,820,000, $1,852,000, and $1,165,000 in 2001, 2000, and 1999,
respectively
(4) Horizon has no foreign office and, accordingly, no assets or liabilities to
foreign operations. Horizon's subsidiary bank had no funds invested in
Eurodollar Certificates of Deposit at December 31, 2001.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
16 HORIZON BANCORP & SUBSIDIARIES
2001 - 2000 2000 - 1999
INCREASE/(DECREASE) INCREASE/(DECREASE)
-----------------------------------------------------------------------------------
CHANGE CHANGE CHANGE CHANGE
TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans - total $ (579) $ 2,336 $ (2,915) $ 11,249 $ 8,499 $ 2,750
Taxable investment securities (786) (486) (300) 224 (8) 232
Nontaxable investment securities 101 102 (1) (154) (146) (8)
Interest-bearing balances and
money market investments 1 0 1 (10) (15) 5
Federal funds sold 87 175 (88) (253) (351) 98
-------- -------- -------- -------- -------- --------
Total interest income (1,176) 2,127 (3,303) 11,056 7,979 3,077
-------- -------- -------- -------- -------- --------
Interest Expense
Savings deposits (273) (14) (259) 48 (132) 180
Interest-bearing demand deposits (30) 722 (752) 1,110 653 457
Time deposits (2,007) (1,139) (868) 3,928 2,499 1,429
Short-term borrowings 313 597 (285) 536 548 (12)
Long-term debt (332) 221 (553) 1,912 1,198 714
-------- -------- -------- -------- -------- --------
Total interest expense (2,329) 389 (2,718) 7,534 4,766 2,768
-------- -------- -------- -------- -------- --------
Net Interest Earnings $ 1,153 $ 1,738 $ (585) $ 3,522 $ 3,213 $ 309
======== ======== ======== ======== ======== ========
Horizon's average earning assets were $502.313 million in 2001 compared to
$477.056 million in 2000 and $392.199 million in 1999. The net interest margin
for 2001 was 3.94% compared to 3.91% and 3.86% in 2000 and 1999, respectively.
The year 2001 saw unprecedented declines in interest rates, which lowered the
yield on interest earning assets. Horizon lowered its deposit rates accordingly
and funded short term rate sensitive assets with short term borrowings to
maintain its net interest margin. The increase in net interest income during
2001 is primarily the result of increased loan volume, particularly in the
mortgage warehouse division where growth came as a result of the low mortgage
rates which caused a home mortgage refinance boom. The increase in net interest
margin from 1999 to 2000 is primarily a result of increased volume and rate in
the loan portfolios.
NONINTEREST INCOME
The major components of noninterest income consist of service charges on deposit
accounts, gain on sale of loans held for sale and fiduciary fees. Service
charges on deposit accounts are based upon: a) recovery of direct operating
expenses associated with providing the service, b) allowing for a profit margin
that provides an adequate return on assets and stockholders' equity, and c)
competitive factors within the Bank's markets. Service charges on deposits were
$2.362 million, $2.028 million and $2.048 million, for 2001, 2000 and 1999,
respectively. The increase in service charges in 2001 is the result of a new
overdraft protection product, offered to certain qualified deposit customers.
Gain on sale of loans was $2.366 million for 2001 compared to $268 thousand in
2000 and $19 thousand for 1999. The 2001 amount includes approximately $184
thousand gain on the sale of portfolio loans while the 2000 amount includes
approximately $147 thousand loss on the sale of portfolio loans. Portfolio loans
were sold to reduce the interest rate risk related to a long term fixed rate
asset. The majority of the 2001 increase however, relates to an increase in the
volume of residential mortgage loans originated for sale. During 2001
approximately $172 million of residential mortgages were originated for sale
into the secondary market compared to approximately $48 million in 2000. This
volume increase resulted from the above mentioned refinance boom. This also
caused a decrease in the Bank's portfolio of residential mortgage loans as a
portion of portfolio loans also refinanced and the Bank opted to sell these new
loans into the secondary market as well.
Fiduciary fees were $2.640 million in 2001 compared to $2.728 million in 2000
and $2.113 million in 1999.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 17
NONINTEREST EXPENSE
Noninterest expense totaled $21.106 million in 2001 compared to $17.905 million
in 2000 and $19.430 million in 1999. In 1999 noninterest expense was adversely
impacted by the expense related to the termination of the ESOP.
Salaries and benefits increased 29.5% during 2001 compared to a decrease of 1.1%
during 2000. The increase for 2001 was caused primarily by two factors: 1)
Commission expense paid to mortgage loan originators increased by $840 thousand
due to the increase in volume of new mortgage loans; 2) Expense related to
vested stock appreciation rights outstanding increased $1.219 million due to the
144% increase in Horizon's stock price.
Total other expenses increased 5.86% in 2001 and 13.76% in 2000. The primary
factors causing the increase in 2001 were: 1) $205 thousand increase in legal
expense related to the Shareholder Value Plan and issues involving employee
benefit plans; 2) $281 thousand increase in loan expense related to the
increased loan volume. The primary factors in the increase of the 2000 expenses
were: 1) $80 thousand increase in professional fees; 2) $144 thousand increase
in outside services and consultant fees; 3) $75 thousand increase in loan
expense and; 4) $57 thousand increase in advertising expense.
INCOME TAXES
Income tax expense, before discontinued operations, totaled $2.592 million in
2001, $1.812 million in 2000 and $675 thousand in 1999. The effective tax rate
was 38.59%, 32.39%, and 139.46% for 2001, 2000, and 1999, respectively. The
effective tax rate is high in 1999 because the majority of the ESOP termination
expenses were not tax deductible. Excluding that expense, the effective tax rate
for 1999 would have been 26.40%.
Liquidity and Rate Sensitivity Management
Management and the Board of Directors meet regularly to review both the
liquidity and rate sensitivity position of Horizon. Effective asset and
liability management ensures Horizon's ability to monitor the cash flow
requirements of depositors along with the demands of borrowers and to measure
and manage interest rate risk. Horizon utilizes an interest rate risk assessment
model designed to highlight sources of existing interest rate risk and consider
the effect of these risks on strategic planning. Management maintains an
essentially balanced ratio of interest sensitive assets to liabilities in order
to protect against the effects of wide interest rate fluctuations.
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 2001,
cash flows were generated primarily from an increase in deposits of $33 million,
increases in borrowings from the FHLB of $30 million and a decrease in
investment securities of $4 million. Cash flows were used for a $75 million
increase in loans and a $12 million decrease in short term borrowings. The net
cash and cash equivalent position declined by $16 million during 2001.
INTEREST SENSITIVITY
The degree by which net interest income may fluctuate due to changes in interest
rates is monitored by Horizon using computer simulation modeling, incorporating
not only the current GAP position but the effect of expected repricing of
specific financial assets and liabilities. When repricing opportunities are not
properly aligned, net interest income may be affected when interest rates
change. Forecasting results of the possible outcomes determine the exposure to
interest rate risk inherent in Horizon's balance sheet. The goal is to manage
imbalanced positions that arise when the total amount of assets repricing or
maturing in a given time period differs significantly from liabilities that are
repricing or maturing in the same time period. The theory behind managing the
difference between repricing assets and repricing liabilities is to have more
assets repricing in a rising rate environment and more liabilities repricing in
a declining rate environment. At December 31, 2001,
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
18 HORIZON BANCORP & SUBSIDIARIES
the amount of assets repricing with one year were approximately 150% of the
amount of liabilities repricing within the same time period. This compares to
79% at December 31, 2000. This shift was caused by the increase in mortgage
warehouse loans which reprice immediately when prime rate changes. This volume
of loans will decline as the refinance boom fades, bringing this ratio back in
line.
RATE SENSITIVITY
----------------------------------------------------
>3 MONTHS >6 MONTHS GREATER
3 MONTHS AND <6 AND <1 THAN 1
AS OF DECEMBER 31, 2001 OR LESS MONTHS YEAR YEAR TOTAL
- -------------------------------------------------------------------------------------------------------
Loans $276,108 $ 22,713 $ 38,691 $ 136,105 $473,617
Money market investments
Interest-bearing balances with Banks 247 247
Investment securities and
FRB and FHLB stock 15,198 3,167 2,244 53,467 74,076
Other assets 40,005 40,005
-------- -------- -------- --------- --------
Total assets $291,553 $ 25,880 $ 40,935 $ 229,577 $587,945
-------- -------- -------- --------- --------
Noninterest-bearing deposits $ 3,588 $ 3,587 $ 7,175 $ 29,003 $ 43,353
Interest-bearing deposits 46,243 58,646 70,539 200,818 376,246
Borrowed funds 15,051 21,036 12,790 78,760 127,637
Other liabilities 5,766 5,766
Stockholders' equity 34,943 34,943
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity $ 64,882 $ 83,269 $ 90,504 $ 349,290 $587,945
-------- -------- -------- --------- --------
GAP $226,671 $(57,389) $(49,569) $(119,713)
Cumulative GAP $226,671 $169,282 $119,713
Included in the GAP analysis are certain interest-bearing demand accounts and
savings accounts. These interest-bearing accounts are subject to immediate
withdrawal. However, Horizon considers approximately 72% of these deposits to be
insensitive to gradual changes in interest rates and generally to behave like
deposits with longer maturities based upon historical experience.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon's primary market risk exposure is interest rate risk. Interest rate risk
(IRR) is the risk that Horizon's earnings and capital will be adversely affected
by changes in interest rates. The primary approach to IRR management is one that
focuses on adjustments to the asset/liability mix in order to limit the
magnitude of IRR.
Horizon's exposure to interest rate risk is due to repricing or mismatch risk,
embedded options risk, and yield curve risk. Repricing risk is the risk of
adverse consequence from a change in interest rates that arise because of
differences in the timing of when those interest rate changes affect Horizon's
assets and liabilities. Basis risk is the risk that the spread, or rate
difference, between instruments of similar maturities will change. Options risk
arises whenever products give the customer the right, but not the obligation, to
alter the quantity or timing of cash flows. Yield curve risk is the risk that
changes in prevailing interest rates will affect instruments of different
maturities by different amounts. Horizon's objective is to remain reasonably
neutral with respect to IRR. Horizon utilizes a variety of strategies to
maintain this position including the sale of mortgage loans on the secondary
market and varying maturities of FHLB advances, certificates of deposit funding,
and investment securities.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 19
The table, which follows, provides information about Horizon's financial
instruments that are sensitive to changes in interest rates as of December 31,
2001. Horizon had no derivative financial instruments or trading portfolio as of
December 31, 2001. The table incorporates Horizon's internal system generated
data related to the maturity and repayment/withdrawal of interest-earning assets
and interest-bearing liabilities. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted average interest rates by contractual maturities as well as the
historical experience of Horizon related to the impact of interest rate
fluctuations on the prepayment of residential loans and mortgage-backed
securities. From a risk management perspective, Horizon believes that repricing
dates are more relevant than contractual maturity dates when analyzing the value
of financial instruments. For deposits with no contractual maturity dates, the
table presents principal cash flows and weighted average rate, as applicable,
based upon Horizon's experience and management's judgment concerning the most
likely withdrawal behaviors.
QUANTITATIVE DISCLOSURE OF MARKET RISK
2007 & Fair Value
2002 2003 2004 2005 2006 Beyond Total 12/31/01
- ----------------------------------------------------------------------------------------------------------------------------------
Rate-sensitive assets
Fixed interest rate loans $ 46,263 $ 21,257 $ 18,267 $ 14,836 $ 10,539 $ 55,628 $166,790 $168,120
Average interest rate 8.19% 8.39% 8.32% 8.22% 7.98% 7.65% 8.01%
Variable interest rate loans 291,249 2,853 4,411 1,985 562 5,767 306,827 308,226
Average interest rate 6.41% 7.71% 7.59% 7.90% 7.38% 7.44% 6.47%
Total loans 337,512 24,110 22,678 16,821 11,101 61,395 473,617 476,346
Average interest rate 6.66% 8.31% 8.17% 8.18% 7.95% 7.63% 7.01%
Securities, including FRB and
FHLB stock 20,609 9,114 2,212 3,273 5,598 33,270 74,076 74,076
Average interest rate 6.20% 6.08% 6.41% 6.66% 5.82% 5.83% 6.08%
Other interest-bearing assets 247 247 247
Average interest rate 4.55% 4.55%
Total earnings assets 358,368 33,224 24,890 20,094 16,699 94,665 547,940 550,669
Average interest rate 6.63% 7.70% 8.01% 7.93% 7.23% 6.99% 6.88%
Rate-sensitive liabilities
Noninterest-bearing deposits $ 14,350 $ 8,806 $ 6,132 $ 4,270 $ 2,974 $ 6,821 $ 43,353 $ 43,353
NOW accounts 36,447 26,868 19,291 13,593 9,601 27,232 133,032 120,700
Average interest rate 1.49% 1.63% 1.62% 1.62% 1.63% 1.64% 1.59%
Savings and money market accounts 15,442 10,603 7,215 4,900 3,359 7,939 49,458 46,217
Average interest rate 1.30% 1.31% 1.28% 1.25% 1.22% 1.17% 1.27%
Certificates of deposit 123,539 28,339 37,557 4,321 193,756 195,239
Average interest rate 4.86% 4.33% 4.64% 4.30% 4.73%
Total deposits 189,778 74,616 70,195 27,084 15,934 41,992 419,599 405,509
Average interest rate 3.55% 2.42% 3.06% 1.73% 1.24% 1.28% 2.84%
Fixed interest rate borrowings 30,097 20,055 15,039 20,028 10,018 57 95,294 97,002
Average interest rate 4.49% 5.00% 6.19% 4.82% 5.31% 7.49% 5.02%
Variable interest rate borrowings 18,781 3,770 2,709 1,907 1,347 3,829 32,343 30,896
Average interest rate 1.98% 1.53% 1.53% 1.53% 1.53% 1.53% 1.79%
Total funds 238,656 98,441 87,943 49,019 27,299 45,878 547,236 533,407
Average interest rate 3.55% 2.91% 3.55% 2.98% 2.75% 1.31% 3.16%
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
20 HORIZON BANCORP & SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for a Business Combination. Statement of Financial Accounting
Standards ("SFAS") No.141 requires that all business combinations be accounted
for using the purchase method of accounting; use of the pooling method is
prohibited. A business combination occurs when an enterprise acquires all or a
portion of the net assets that constitutes a business or equity interests of one
or more other enterprises and obtains control over the enterprise or
enterprises. All two-party and multi-party business combinations, including
"roll-up" and "put-together" transactions are included in the scope of this
Statement.
This Statement requires that goodwill be initially recognized as an asset in the
financial statement and measured as the excess of the cost of an acquired entity
over the net of the amounts assigned to identifiable assets acquired and
liabilities assumed. In addition, SFAS No. 141 requires all other intangibles,
such as core deposit intangibles for a financial institution, to be identified.
The provisions of Statement No. 141 are effective for any business combination
that is initiated after June 30, 2001.
Accounting for Goodwill. Under the provisions SFAS No. 142, goodwill should not
be amortized but should be tested for impairment at the reporting unit level.
Impairment test of goodwill should be done on an annual basis unless events or
circumstances indicate impairment has occurred in the interim period. The annual
impairment test can be performed at any time during the year as long as the
measurement date is used consistently from year to year.
Impairment testing is a two step process. The first step is a comparison of the
fair value of a reporting unit to its carrying amount including goodwill. If the
fair value of the reporting unit is greater than its carrying value, goodwill is
not impaired and no further work is required. Companies should perform the first
step of the impairment test on all goodwill within six months of initially
applying the Statement. If the fair value is less, the second step should be
performed. The second step is to compare the fair value of goodwill to its
carrying amount. If the fair value of goodwill is less than its carrying value,
then the goodwill is deemed impaired and a loss recognized. Any impairment loss
recognized as a result of completing the transitional impairment test should be
treated as a change in accounting principle and recognized in the first interim
period financial statements.
The provisions of Statement No. 142 are effective for fiscal years beginning
December 15, 2001. Goodwill and intangible assets acquired in a transaction
completed after June 30, 2001, but before this Statement is initially applied
would be accounted for in accordance with the amortization and nonamortization
provisions of the Statement. The useful economic life of previously recognized
intangible assets should be reassessed upon adoption of the Statement, and
remaining amortization periods should be adjusted accordingly. Intangible assets
deemed to have an indefinite life would no longer be amortized.
The Company will adopt these new accounting rules on January 1, 2002. As a
result, the Company will no longer amortize the goodwill that it recorded on
certain acquisitions prior to June 30, 2001, but will make an annual assessment
of any impairment in goodwill and, if necessary, recognize an impairment loss at
that time. The Company had goodwill of $1.0 million at December 31, 2001, and
goodwill amortization of $90 thousand for the year ended December 31, 2001.
FORWARD-LOOKING STATEMENTS
Certain statements in this section constitute forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to differ materially from any future results,
performance, or achievements expressed or implied by such forward-looking
statements.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
(Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 21
[Photo]
Financial Statements
Consolidated Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . .26
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 28
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . .45
Other Information
Management's Report on Financial Statements . . . . . . . . . . . . . . . . 46
Horizon's Common Stock and Related Stockholders' Matters . . . . . . . . . .47
23
HORIZON BANCORP
Consolidated Balance Sheets(Dollar Amounts In Thousands)
DECEMBER 31 2001 2000
---------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 18,608 $ 34,018
Interest-bearing demand deposits 20 1,033
------ -----
Cash and cash equivalents 18,628 35,051
Interest-bearing deposits 247 238
Investment securities available for sale 67,338 71,375
Loans held for sale 6,816 4,176
Loans, net of allowance for loan losses of $5,410 and $4,803 461,391 388,775
Premises and equipment 16,197 17,281
Federal Reserve and Federal Home Loan Bank stock 6,738 6,239
Interest receivable 3,209 3,301
Other assets 7,381 5,340
------ -----
Total assets $587,945 $531,776
======== ========
Liabilities
Deposits
Noninterest bearing $ 43,353 $ 30,044
Interest bearing 376,246 356,304
------ -----
Total deposits 419,599 386,348
Short-term borrowings 22,344 34,148
Federal Home Loan Bank advances 105,293 75,320
Interest payable 765 1,015
Other liabilities 5,001 3,321
------ -----
Total liabilities 553,002 500,152
======= =======
Commitments and Contingencies
Equity Received from Contributions and
Dividends to the Stock Bonus Plan -- 6,676
------ -----
Stockholders' Equity
Common stock, $.33 1/3 stated value
Authorized, 15,000,000 shares
Issued, 3,115,284 shares, less Stock Bonus Plan shares of
394,956 in 2000 1,038 907
Additional paid-in capital 20,808 14,263
Retained earnings 28,130 25,184
Accumulated other comprehensive income 430 9
Treasury stock, at cost, 1,129,587 and 1,126,650 shares (15,463) (15,415)
------ ------
Total stockholders' equity 34,943 24,948
------ -----
Total liabilities and stockholders' equity $587,945 $531,776
======== ========
See notes to consolidated financial statements.
FINANCIAL STATEMENTS
24 HORIZON BANCORP & SUBSIDIARIES
HORIZON BANCORP
Consolidated Statements of Income(Dollar Amounts In Thousands Except Per Share Data)
YEAR ENDED DECEMBER 31 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Interest Income
Loans receivable $36,304 $36,883 $ 25,634
Investment securities
Taxable 4,359 5,057 5,096
Tax exempt 114 13 167
------ ------ ------
Total interest income 40,777 41,953 30,897
------ ------ ------
Interest Expense
Deposits 15,975 17,689 12,603
Federal funds purchased and short-term borrowings 329 612 76
Federal Home Loan Bank advances 4,666 4,998 3,086
------ ------ ------
Total interest expense 20,970 23,299 15,765
------ ------ ------
Net Interest Income 19,807 18,654 15,132
Provision for loan losses 1,505 2,010 1,100
------ ------ ------
Net Interest Income After Provision for Loan Losses 18,302 16,644 14,032
------ ------ ------
Other Income
Service charges on deposit accounts 2,362 2,028 2,048
Wire transfer fee income 557 479 91
Fiduciary activities 2,640 2,728 2,113
Gain on sale of mortgage loans 2,366 268 19
Gain on sale of securities 2 177
Commission income from insurance agency 849 812 811
Other income 745 541 619
------ ------ ------
Total other income 9,521 6,856 5,878
------ ------ ------
Other Expenses
Salaries and employee benefits 11,801 9,115 9,017
ESOP termination expense 2,073
Net occupancy expenses 1,725 1,733 1,692
Data processing and equipment expenses 2,177 2,077 2,079
Other expenses 5,403 4,980 4,565
------ ------ ------
Total other expenses 21,106 17,905 19,426
------ ------ ------
Income Before Income Tax 6,717 5,595 484
Income tax expense 2,592 1,812 675
------ ------ ------
Net Income (Loss) From Continuing Operations 4,125 3,783 (191)
------ ------ ------
Discontinued Operations
Loss from operation of discontinued subsidiary (less tax benefit of $56) (81)
Loss on disposal of subsidiary, including provision of
$134 for operating losses during phase-out period
(less tax benefit of $52) (82)
---
Total loss from discontinued operations (163)
----
Net Income (Loss) $ 4,125 $ 3,783 $ (354)
======= ======= ======
Basic & diluted earnings (loss) per share from continuing operations $ 2.08 $ 1.85 $ (.10)
Basic & diluted earnings (loss) per share from loss on
discontinued operations (.08)
------- ------- ------
Basic and Diluted Earnings (Loss) per Share $ 2.08 $ 1.85 $ (.18)
======= ======= ======
See notes to consolidated financial statements.
FINANCIAL STATEMENTS
HORIZON BANCORP & SUBSIDIARIES 25
HORIZON BANCORP
Consolidated Statements of Stockholders' Equity (Dollar Amounts In Thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME (LOSS) EARNINGS INCOME (LOSS) STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 $741 $ 8,834 $24,201 $ 336 $ (6,644) $27,468
Net loss $ (354) (354) (354)
Other comprehensive loss, net of tax,
unrealized losses on securities, net
of reclassification adjustment (1,537) (1,537) (1,537)
Comprehensive loss $(1,891)
Cash dividends ($.60 per share) (1,218) (1,218)
Purchase of 501,735 shares
of treasury stock (7,619) (7,619)
Issuance of 12,000 shares of
common stock for purchase
of investment management entity 4 196 200
Net purchases and distributions
with ESOP 128 4,058 4,186
Tax benefit of ESOP
dividend deduction 65 65
-- --
Balances, December 31, 1999 873 13,153 22,629 (1,201) (14,263) 21,191
Net income $ 3,783 3,783 3,783
Other comprehensive income, net of
tax, unrealized gains on securities 1,210 1,210 1,210
-------
Comprehensive income $ 4,993
-------
Cash dividends ($.60 per share) (1,228) (1,228)
------
Purchase of 80,199 shares
of treasury stock (1,200) (1,200)
Re-issuance of 4,428 shares of
common stock for partial payment
of directors fees 12 48 60
Net purchases and distributions
with Stock Bonus Plan 34 1,098 1,132
-- ----- -----
Balances, December 31, 2000 907 14,263 25,184 9 (15,415) 24,948
Net income $ 4,125 4,125 4,125
Other comprehensive income, net of
tax, unrealized gains on securities 421 421 421
-------
Comprehensive income $ 4,546
-------
Cash dividends ($.60 per share) (1,179) (1,179)
Purchase of 2,937 shares of
treasury stock (48) (48)
Transfer of Stock Bonus Plan shares
to equity 131 6,545 6,676
--- ----- ------- ------- -------- -----
Balances, December 31, 2001 $1,038 $20,808 $28,130 $ 430 $(15,463) $34,943
====== ======= ======= ======= ======== =======
See notes to consolidated financial statements.
FINANCIAL STATEMENTS
26 HORIZON BANCORP & SUBSIDIARIES
HORIZON BANCORP
Consolidated Statements of Cash Flows (Dollar Amounts In Thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 4,125 $ 3,783 $ (354)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses 1,505 2,010 1,100
Additional paid-in capital from release of ESOP shares 1,807
Depreciation and amortization 1,476 1,445 1,409
Deferred income tax (808) (157) (98)
Discontinued operations 237
Gain on sale of loans (2,366) (268) (19)
Proceeds from sales of loans 148,988 33,265 11,993
Loans originated for sale (149,262) (37,173)
Other adjustments 51 (151) 191
Net change in
Interest receivable 92 (521) (531)
Interest payable (250) 95 103
Other assets (1,417) (813) 1,586
Other liabilities 1,680 412 (141)
----- ----- ------
Net cash provided by operating activities 3,814 1,927 17,283
----- ----- ------
Investing Activities
Purchases of securities available for sale (24,142) (13,321) (35,250)
Proceeds from maturities, calls, and principal
repayments of securities available for sale 28,384 11,718 17,708
Proceeds from sales of securities available for sale 317 11,738
Proceeds from maturities, calls, and principal
repayments of securities held to maturity 1,785
Net change in loans (74,619) 245 (117,265)
Principal payments received on ESOP loan 5,769
Proceeds from sale of fixed assets 23 715
Recoveries on loans previously charged-off 683 334 363
Purchases of premises and equipment (545) (651) (2,070)
Purchase of Federal Reserve and Federal Home Loan Bank stock (499) (342) (1,924)
Other investing activities (9) (6) 193
----- ----- ------
Net cash used by investing activities (70,430) (2,000) (118,238)
----- ----- ------
Financing Activities
Net change in
Deposits 33,251 22,680 41,267
Short-term borrowings (11,804) 9,648 20,500
Federal Home Loan Bank advances 212,000 50,320 66,000
Repayment of Federal Home Loan Bank advances (182,027) (80,000) (15,000)
Dividends paid (1,179) (1,228) (1,218)
Re-issuance of treasury stock 60
Purchase of treasury stock (48) (1,200) (7,619)
----- ----- ------
Net cash provided by financing activities 50,193 280 103,930
----- ----- ------
Net Change in Cash and Cash Equivalents (16,423) 207 2,975
Cash and Cash Equivalents, Beginning of Year 35,051 34,844 31,869
----- ----- ------
Cash and Cash Equivalents, End of Year $ 18,628 $ 35,051 $ 34,844
======== ========= ========
Additional Cash Flows Information
Interest paid $ 21,220 $ 23,394 $ 15,868
Income tax paid 2,540 2,150 350
See notes to consolidated financial statements.
FINANCIAL STATEMENTS
HORIZON BANCORP & SUBSIDIARIES 27
HORIZON BANCORP
Notes to Consolidated Financial Statements
NOTE 1-- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- The consolidated financial statements of Horizon Bancorp
(Horizon) and its wholly owned subsidiaries, Horizon Bank, N.A. (Bank), HBC
Insurance Group, Inc. (Insurance Company), and The Loan Store, Inc. conform to
accounting principles generally accepted in the United States of America and
reporting practices followed by the banking industry.
The Bank is a full-service commercial bank offering a broad range of commercial
and retail banking and other services incident to banking. The Bank has two
wholly-owned subsidiaries: Horizon Trust & Investment Management, Inc. (HTIM)
and Horizon Insurance Services, Inc (Insurance Agency). HTIM offers corporate
and individual trust and agency services and investment management services. The
Insurance Agency offers a full line of commercial and personal insurance
products. The Bank maintains four facilities in LaPorte County, Indiana and
three facilities in Porter County, Indiana. The Insurance Company offers credit
insurance. The net income generated from the insurance operations is not
significant to the overall operations of Horizon. The Loan Store, Inc. is a
discontinued operation and sold its loan portfolio to another finance company in
August 1999. Horizon conducts no business except that incident to its ownership
of the subsidiaries.
BASIS OF REPORTING -- The consolidated financial statements include the accounts
of Horizon and subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENT SECURITIES AVAILABLE FOR SALE -- Horizon designates its investment
portfolio as available for sale based on management's plans to use such
securities for asset and liability management, liquidity, and not to hold such
securities as long-term investments. Management repositions the portfolio to
take advantage of future expected interest rate trends when Horizon's long-term
profitability can be enhanced. Investment securities available for sale and
marketable equity securities are carried at estimated fair value and any net
unrealized gains/losses (after tax) on these securities are included in
accumulated other comprehensive income. Gains/losses on the disposition of
securities available for sale are recognized at the time of the transaction and
are determined by the specific identification method.
LOANS HELD FOR SALE -- Loans held for sale are reported at the lower of cost or
market value in the aggregate.
INTEREST AND FEES ON LOANS -- Interest on commercial, mortgage, and installment
loans is recognized over the term of the loans based on the principal amount
outstanding. When principal or interest is past due 90 days or more, and the
loan is not well secured and it is in the process of collection, or when serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued. Loan origination fees, net of direct loan origination costs, are
deferred and recognized over the life of the loan as a yield adjustment.
CONCENTRATIONS OF CREDIT RISK -- The Bank grants commercial, real estate, and
consumer loans to customers located primarily in LaPorte County and portions of
Porter County in Northwest Indiana and provides mortgage warehouse lines to
mortgage companies in the United States. Commercial loans make up approximately
22% of the loan portfolio and are secured by both real estate and business
assets. These loans are expected to be repaid from cash flow from operations of
the businesses. Real estate loans make up approximately 17% of the loan
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
28 HORIZON BANCORP & SUBSIDIARIES
portfolio and are secured by both commercial and residential real estate.
Installment loans make up approximately 17% of the loan portfolio and are
primarily secured by consumer assets. Mortgage warehouse loans make up
approximately 44% of the loan portfolio and are secured by residential real
estate.
MORTGAGE WAREHOUSE LOANS -- Horizon purchases residential mortgage loans from
various mortgage companies prior to sale of these loans by the mortgage
companies in the secondary market. Horizon held loans to individuals that were
purchased under agreements to resell from 30 approved mortgage companies at
December 31, 2001. Horizon purchases such loans from mortgage companies, net of
certain fees, and later sells them back to the mortgage companies at the same
amount and without recourse provisions. As a result, no gains and losses are
recorded at the resale of loans. Horizon records interest and fee income on the
loans during the funding period. Horizon uses the stated interest rate in the
agreement with each mortgage company for interest income recognition, and not
the interest rates on the individual loans. Horizon does not retain servicing of
the loans when they are resold. Loans consist of purchase money and refinance
mortgage loans and are generally held no more than 90 days by Horizon and are
typically resold within 30 days.
ALLOWANCE FOR LOAN LOSSES -- An allowance for loan losses is maintained to
absorb loan losses inherent in the loan portfolio. The allowance is based on
ongoing quarterly assessments of the probable estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for credit losses,
which is charged against current period operating results and decreased by the
amount of chargeoffs, net of recoveries. Horizon's methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
the formula allowance, specific allowances for identified problem loans, and the
unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments. Loss factors are based on a historical
loss experience and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date.
Specific allowances are established in cases where management has identified
conditions or circumstances related to a credit that management believes
indicate the probability that a loss will be 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.
LOAN IMPAIRMENT -- When analysis determines a borrower's operating results and
financial condition are not adequate to meet 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 also often considered impaired.
Impaired loans, or portions thereof are charged-off when deemed uncollectible.
This typically occurs when the loan is 120 or more days past due.
Loans are considered impaired if full principal or interest payments are not
made in accordance with the original terms of the loan. Impaired loans are
measured and carried at the lower of cost or the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent.
Smaller balance homogenous loans are evaluated for impairment in the aggregate.
Such loans include residential first mortgage loans secured by one to four
family residences, residential construction loans and automobile, home equity,
and second mortgages. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 29
PREMISES AND EQUIPMENT -- Buildings and major improvements are capitalized and
depreciated using primarily the straight-line method with useful lives ranging
from 3 to 40 years. Furniture and equipment are capitalized and depreciated
using primarily the straight-line method with useful lives ranging from 3 to 20
years. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on disposition are included
in current operations.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK -- The stock is a required
investment for institutions that are members of the Federal Reserve and Federal
Home Loan Bank systems. The required investment in the common stock is based on
a predetermined formula.
SERVICING RIGHTS -- Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on mortgage loans sold. Servicing
rights are expensed in proportion to, and over the period of, estimated net
servicing revenue. Impairment is evaluated based on the fair value of the
rights, using groupings of the underlying loans to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Any impairment of
a grouping is reported as a valuation allowance.
INTANGIBLE ASSETS -- Intangible assets are being amortized on the straight-line
basis over a 15-year period. Such assets are periodically evaluated as to the
recoverability of their carrying value.
INCOME TAXES -- Horizon files annual consolidated income tax returns with its
subsidiaries. Income tax in the consolidated statements of income includes
deferred income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes.
TRUST ASSETS AND INCOME -- Property, other than cash deposits, held in a
fiduciary or agency capacity is not included in the consolidated balance sheets
since such property is not owned by Horizon.
EARNINGS PER COMMON SHARE AND DIVIDENDS DECLARED PER COMMON SHARE -- Basic EPS
is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. 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. Horizon has no potential dilutive
instruments. The outstanding stock options are not included in the computation
of diluted EPS because the contracts may be settled in common stock or in cash
at the election of the option holder. Historically, all contracts have been
settled in cash and it is anticipated that the exercise of future contracts will
also be settled in cash. The number of shares used in the computation of basic
and diluted earnings per share is 1,985,458 for 2001, 2,048,649 for 2000, and
1,966,173 for 1999.
DIVIDEND RESTRICTIONS -- Regulations of the Comptroller of the Currency limit
the amount of dividends that may be paid by a national bank to its parent
holding company without prior approval of the Comptroller of the Currency. Total
stockholder's equity for the Bank at December 31, 2001, was $36,129,758 of which
$29,046,325 was restricted from dividend distribution to Horizon. Additionally,
the Federal Reserve Board limits the amount of dividends that may be paid by
Horizon to its stockholders under its capital adequacy guidelines.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows,
cash and cash equivalents are defined to include cash and due from banks, money
market investments, and federal funds sold with maturities of one day or less.
Horizon reports net cash flows for customer loan transactions, deposit
transactions, short-term investments, and short-term borrowings.
STOCK SPLIT -- On October 16, 2001, the Board of Directors of the Company
declared a three for one stock split. All share and per share amounts have been
adjusted to give effect for the stock split.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 2000 and
1999 financial statements to be comparable to 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
30 HORIZON BANCORP & SUBSIDIARIES
NOTE 2-- INVESTMENT SECURITIES
2001
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $20,255 $ 122 $ (59) $20,318
State and municipal 15,411 277 (378) 15,310
FHLMC mortgage-backed securities 4,979 98 (5) 5,072
FNMA mortgage-backed securities 8,833 212 9,045
GNMA collateralized mortgage obligations 8,000 (15) 7,985
FHLMC collateralized mortgage obligation 7,737 419 8,156
FNMA collateralized mortgage obligations 1,413 50 (11) 1,452
----- -- --- -----
Total investment securities $66,628 $1,178 $ (468) $67,338
======= ====== ====== =======
2000
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury and federal agencies $26,171 $ 35 $(204) $26,002
State and municipal 5,564 134 (2) 5,696
FHLMC mortgage-backed securities 5,598 63 (16) 5,645
FNMA mortgage-backed securities 13,252 57 (20) 13,289
GNMA collateralized mortgage obligations 8,026 (238) 7,788
FHLMC collateralized mortgage obligation 7,725 227 7,952
FNMA collateralized mortgage obligations 4,707 55 4,762
Marketable equity securities 315 (74) 241
--- --- ---
Total investment securities $71,358 $ 571 $(554) $71,375
======= ====== ====== =======
The amortized cost and fair value of securities available for sale at December
31, 2001, 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.
AMORTIZED FAIR
COST VALUE
- ---------------------------------------------------------------------------
Within one year $ 3,038 $ 3,076
One to five years 7,633 7,829
Five to ten years 11,673 11,818
After ten years 13,322 12,905
--------------------
35,666 35,628
Mortgage-backed securities 13,812 14,117
Collateralized mortgage obligations 17,150 17,593
--------------------
Totals $66,628 $67,338
====================
Securities with a carrying value of $20,669,000 and $20,174,000 were pledged at
December 31, 2001 and 2000, to secure certain public and trust deposits and
securities sold under agreements to repurchase.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 31
Proceeds from sales of securities available for sale during 2001 were $317,000.
Gross gains of $2,000 were realized on these sales. There were no sales of
securities available for sale during 2000. Proceeds from sales of securities
available for sale during 1999 were $11,738,000. Gross gains of $217,000 and
gross losses of $40,000 were realized on these sales.
During the second quarter of 1999 debt securities with an amortized cost of
$10,050,000 were transferred from held to maturity to available for sale so the
Bank could minimize the tax consequences of holding tax-exempt securities. The
securities had an unrealized gain of approximately $350,000. There were no
transfers between classifications during 2001 or 2000.
NOTE 3-- LOANS AND ALLOWANCE
DECEMBER 31 2001 2000
- ------------------------------------------------------------------------------
Commercial loans $ 100,912 $ 88,421
Mortgage warehouse loans 205,511 102,884
Real estate loans 80,571 125,431
Installment loans 79,807 76,842
------ ------
466,801 393,578
Allowance for loan losses (5,410) (4,803)
------ ------
Total loans $ 461,391 $ 388,775
========= =========
DECEMBER 31 2001 2000 1999
- -------------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $4,803 $3,273 $2,787
Provision for losses 1,505 2,010 1,100
Provision for losses, discontinued operations 250
Recoveries on loans 683 334 363
Loans charged off (1,581) (814) (1,227)
------ ---- ------
Balances, December 31 $5,410 $4,803 $3,273
====== ====== ======
Impaired loans for which the discounted cash flows or collateral value exceeded
the carrying value of the loan totaled $1,028,000 and $609,000 at December 31,
2001 and 2000, respectively. No loans were considered impaired during 1999. The
allowance for impaired loans, included in the Bank's allowance for loan losses,
totaled $242,000 and $40,000 at December 31, 2001 and 2000, respectively. The
average balance of impaired loans during 2001 was $1,168,000 and $609,000 during
2000. There was $44,000 of interest income recorded and received during 2001 and
no interest income was recorded or received during 2000.
At December 31, 2001 and 2000, loans past due more than 90 days and still
accruing interest totaled approximately $128,000 and $699,000.
Loans on which the recognition of interest has been discontinued or reduced
totaled approximately $1,772,000, $2,487,000, and $1,173,000 at December 31,
2001, 2000, and 1999. Interest income not recognized on these loans totaled
approximately $129,000, $241,000, and $62,000 in 2001, 2000, and 1999.
Loans to directors and executive officers of Horizon and the Bank, including
associates of such persons, amounted to $6,418,000 and $5,434,000, as of
December 31, 2001 and 2000. During 2001 new loans or advances were $4,678,000
and loan payments were $3,694,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 32
NOTE 4-- PREMISES AND EQUIPMENT
DECEMBER 31 2001 2000
- --------------------------------------------------------------------------
Land $ 3,206 $ 3,206
Buildings and improvements 16,536 16,680
Furniture and equipment 8,264 8,323
----- -----
Total cost 28,006 28,209
Accumulated depreciation (11,809) (10,928)
----- -----
Net $ 16,197 $17,281
======== =======
NOTE 5-- LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of loans serviced for others
totaled approximately $106,140,000 and $53,169,000 at December 31, 2001 and
2000.
The Bank began capitalizing mortgage servicing rights during 2000 and the
aggregate fair value of capitalized mortgage servicing rights at December 31,
2001, totaled approximately $1,005,000. 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.
2001 2000
- --------------------------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $ 316 $ 0
Servicing rights capitalized 688 333
Amortization of servicing rights (112) (17)
------ -----
Balances, December 31 $ 892 $ 316
====== =====
NOTE 6 -- DEPOSITS
DECEMBER 31 2001 2000
- ----------------------------------------------------------------------------
Noninterest bearing demand deposits $ 43,353 $ 30,044
Interest bearing demand deposits 133,113 93,432
Money market (variable rate) 16,826 2,124
Savings deposits 32,632 32,196
Certificates of deposit of $100,000 or more 45,334 68,914
Other certificates and time deposits 148,341 159,638
------- -------
Total deposits $419,599 $386,348
======== ========
Certificates and other time deposits maturing in years ending December 31 are as
follows:
2002 $123,341
2003 27,317
2004 38,696
2005 4,301
2006 20
--------
$193,675
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 33
NOTE 7 -- SHORT-TERM BORROWINGS
DECEMBER 31 2001 2000
- --------------------------------------------------------------------------------
Federal funds purchased $ 2,000 $ 14,700
Securities sold under agreements to repurchase 18,344 16,698
Notes payable, unsecured 2,000 2,750
----- -----
Total short-term borrowings $ 22,344 $ 34,148
======== ========
Securities sold under agreements to repurchase consist of obligations of the
Bank to other parties. The obligations are secured by U.S. agency and
mortgage-backed securities and such collateral is held in safekeeping by third
parties. The maximum amount of outstanding agreements at any month end during
2001 and 2000 totaled $18,358,000 and $16,698,000 and the daily average of such
agreements totaled $16,495,000 and $2,590,000. The agreements at December 31,
2001, are due on demand.
Horizon has an unsecured $5,000,000 line of credit, of which $2,000,000 was
outstanding at December 31, 2001. The loan is from an unrelated financial
institution with interest payable quarterly at a rate indexed to LIBOR. The note
matures within one year.
At December 31, 2001, the Bank has available approximately $29,000,000 in credit
lines with various money center banks.
NOTE 8-- FHLB ADVANCES
DECEMBER 31 2001 2000
- -------------------------------------------------------------------------------
Federal Home Loan Bank advances, variable and fixed rates,
due at various dates through May 15, 2020 $105,293 $75,320
======== =======
The Federal Home Loan Bank advances are secured by first-mortgage loans and
investment securities totaling approximately $323,543,000. Advances are subject
to restrictions or penalties in the event of prepayment.
Contractual maturities in years ending December 31
2002 $40,029
2003 20,032
2004 15,034
2005 37
2006 40
Thereafter 30,121
------
$105,293
========
NOTE 9-- EMPLOYEE STOCK BONUS PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
Horizon maintains an employee stock bonus plan (Stock Bonus Plan) that covers
substantially all employees. The Stock Bonus Plan is noncontributory and Horizon
may make discretionary matching contributions and regular contributions.
Employee voluntary contributions are vested at all times and Horizon's
contributions vest over a six year period. Prior to the establishment of the
Stock Bonus Plan, Horizon maintained an employee stock ownership plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
34 HORIZON BANCORP & SUBSIDIARIES
On July 20, 1999, the Board of Directors of Horizon Bancorp authorized the
termination of the Horizon Bancorp Employee Stock Ownership Plan (ESOP). On
December 31, 1999, the debt owed by the ESOP was repaid with the proceeds from
the sale of a portion of the unallocated shares to Horizon. The remaining shares
for all active participants were allocated to participants. The expense related
to the termination of the ESOP totaled $2,073,000 in 1999. The retirement plans
of Horizon own approximately 19% of the outstanding shares. The remaining shares
in the ESOP plan were transferred to the Stock Bonus Plan.
Prior to 2001 the Stock Bonus Plan's equity was classified outside of
shareholders' equity. In 2001 Horizon's common shares became listed on a
national market system. Since the shares in the Stock Bonus Plan are now readily
marketable, Horizon reclassified the Stock Bonus Plan equity to shareholders'
equity during 2001.
Total cash contributions and expense recorded during the years 2001 and 2000 for
the Stock Bonus Plan were $150,000 and $200,000, respectively. There were no
contributions to the Stock Bonus Plan during 1999.
Transactions affecting ESOP expense and cash contributions to the ESOP are as
follows:
DECEMBER 31 1999
- -------------------------------------------------------------------
Dividends paid on unallocated ESOP shares $ 200
Market value increase of shares released 1,807
Other contributions 793
Total ESOP expense included in ESOP termination expense
and salaries and benefits $ 2,800
Total cash contributions made to ESOP during the year $ 793
Below are the transactions affecting the Stock Bonus
Plan / ESOP equity accounts:
ADDITIONAL UNALLOCATED
COMMON PAID-IN ESOP
STOCK CAPITAL SHARES TOTAL
---------------------------------------------
Balances, January 1, 1999 $ 293 $ 9,894 $(5,769) $ 4,418
Market value increase in ESOP shares released 1,807 1,807
Loan repayments 5,769 5,769
Sale of stock, at cost (108) (3,749) (3,857)
Net ESOP share purchases and distributions (20) (309) (329)
--- ---- ---- ----
Balances, December 31, 1999 165 7,643 0 7,808
Net Stock Bonus Plan share purchases and distributions (34) (1,098) (1,132)
--- ---- ---- ----
Balances, December 31, 2000 131 6,545 0 6,676
Transfer of Stock Bonus Plan shares to equity (131) (6,545) (6,676)
--- ---- ---- ----
Balances, December 31, 2001 $ 0 $ 0 $ 0 $ 0
===== ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 35
NOTE 10-- EMPLOYEE THRIFT PLAN
The Employee Thrift Plan (Plan) provides that all employees of Horizon with the
requisite hours of service are eligible for the Plan. The Plan permits voluntary
employee contributions and Horizon may make discretionary matching and profit
sharing contributions. Each eligible employee is vested according to a schedule
based upon years of service. Employee voluntary contributions are vested at all
times and Horizon's contributions vest over a six-year period. The Bank's 2001,
2000, and 1999 expense related to the thrift plan totaled $203,000, $201,000,
and $196,000.
NOTE 11-- OTHER EXPENSES
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------
Supplies and printing $ 314 $ 289 $ 311
Advertising 651 511 454
Communication 703 628 622
Professional fees 1,037 826 746
Training 108 107 87
Outside services and consultants 678 776 632
Reinsurance company 48 69 95
Loan expenses 631 350 275
Goodwill amortization 90 90 87
Directors fees 224 191 207
Insurance expense 234 212 197
Loss on disposal of fixed assets 153 36 219
Other 532 895 633
--- --- ---
Total other expenses $5,403 $4,980 $4,565
====== ====== ======
NOTE 12-- INCOME TAX
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $2,791 $1,526 $552
State 609 443 221
Deferred (808) (157) (98)
------ ------ ----
Total income tax expense $2,592 $1,812 $675
====== ====== ====
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $2,284 $1,902 $165
Tax exempt interest (145) (150) (220)
Nondeductible and other (51) (32) (28)
Nondeductible ESOP expense 612
Effect of state income taxes 402 292 146
Decrease in valuation allowance (200)
------ ------ ----
Actual tax expense $2,592 $1,812 $675
====== ====== ====
Tax expense applicable to securities gains for 2001 and 1999 was $792 and
$70,110. There were no security sales in 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
36 HORIZON BANCORP & SUBSIDIARIES
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
DECEMBER 31 2001 2000
- -------------------------------------------------------------------------------
Assets
Allowance for loan losses $1,626 $ 1,033
Accrued operating expenses 66 69
Loan fees 42 58
Director and employee benefits 543 315
--- ---
Total assets 2,277 1,475
===== =====
Liabilities
Depreciation (659) (744)
Other (84) (5)
Unrealized gain on securities available for sale (280) (8)
Total liabilities (1,023) (757)
------ ----
Net deferred tax asset $ 1,254 $ 718
======== =======
The valuation allowance at December 31, 1999, was $200,000. The valuation
allowance decreased $200,000 during 2000 and there was no valuation allowance at
December 31, 2001 or 2000. The decrease in the valuation allowance was a result
of Horizon generating taxable income in 2000 that utilized the alternative
minimum tax (ATM) credit carryforward.
NOTE 13-- OTHER COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the year $695 $1,984 $(2,343)
Less: reclassification adjustment for gains
realized in net income 2 177
Net unrealized gains (losses) 693 1,984 (2,520)
--- ----- ------
Tax (expense) benefit (272) (774) 983
--- ----- ------
Other comprehensive income (loss) $421 $1,210 $(1,537)
==== ====== =======
NOTE 14-- COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
Because of the nature of its activities, Horizon is subject to pending and
threatened legal actions that arise in the normal course of business. In
management's opinion, after consultation with counsel, none of the litigation to
which Horizon or any of its subsidiaries is a party will have a material effect
on the consolidated financial position or results of operations of Horizon.
The Bank was required to have approximately $11,933,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and clearing
balance requirements at December 31, 2001. These balances are included in cash
and cash equivalents and do not earn interest.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 37
The Bank is a party to financial instruments with off-balance sheet risk in the
ordinary course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans and standby letters of
credit. The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank follows the same credit policy to make such commitments as
is followed for those loans recorded in the financial statements.
At December 31, 2001 and 2000, commitments to make loans amounted to
approximately $50,543,000 and $59,789,000 and commitments under outstanding
standby letters of credit amounted to approximately $1,445,000 and $1,186,000.
Since many commitments to make loans and standby letters of credit expire
without being used, the amount does not necessarily represent future cash
advances. No losses are anticipated as a result of these transactions.
Collateral obtained upon exercise of the commitment is determined using
management's credit evaluation.
NOTE 15-- REGULATORY CAPITAL
Horizon and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 2001 and 2000,
Horizon and the Bank are categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since December
31, 2001, that management believes have changed Horizon's or the Bank's
classification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
38 HORIZON BANCORP & SUBSIDIARIES
Horizon's and the Bank's actual and required capital amounts and ratios are as
follows:
MINIMUM REQUIRED
TO BE WELL
REQUIRED FOR CAPITALIZED(1)UNDER
CAPITAL(1) ADEQUACY ACTION
ACTUAL PURPOSES REQUIREMENTS
--------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------
As of December 31, 2001
Total capital (1) (to risk-weighted assets)
Consolidated $37,940 10.41% $29,144 8.00% N/A N/A
Bank 39,127 10.78 29,000 8.00 $36,311 10.00%
Tier I capital (1) (to risk-weighted assets)
Consolidated 33,390 9.17 14,572 4.00 N/A N/A
Bank 34,577 9.52 14,525 4.00 21,787 6.00
Tier I capital (1) (to average assets)
Consolidated 33,390 5.86 22,793 4.00 N/A N/A
Bank 34,577 6.07 22,771 4.00 28,464 5.00
As of December 31, 2000
Total capital (1) (to risk-weighted assets)
Consolidated $34,445 10.69% $25,785 8.00% N/A N/A
Bank 34,903 10.88 25,653 8.00 $32,067 10.00%
Tier I capital (1) (to risk-weighted assets)
Consolidated 30,406 9.43 12,893 4.00 N/A N/A
Bank 30,885 9.63 12,827 4.00 19,200 6.00
Tier I capital (1) (to average assets)
Consolidated 30,406 5.47 22,245 4.00 N/A N/A
Bank 30,885 5.91 20,910 4.00 26,137 5.00
(1) As defined by regulatory agencies
NOTE 16-- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Horizon maintains the 1987 Nonqualified Stock Option and Stock Appreciation
Right Plan (1987 Plan) under which options and stock appreciation rights (SARs)
were granted to certain officers and employees. SARs entitle eligible employees
to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock
covered by the option over the option exercise price. The underlying stock
options are deemed to have been exercised upon exercise of the SARs. No options
were available for grant at December 31, 2001, 2000, and 1999, however,
outstanding options may be exercised until their expiration.
Horizon recognizes compensation expense related to the 1987 Plan on a periodic
basis based on the difference between the excess of the fair market value of the
shares of common stock over the exercise price for SARs and those options
exercised during the year. Horizon recorded compensation expense related to the
1987 plan of $342,000 in 2001 and a reduction in compensation expense of
$206,000 and $103,000 in 2000 and 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 39
A summary of transactions for the plan follows:
SHARES
--------------------- WEIGHTED-
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------------------------------------
Balances, January 1, 1999 and 2000 0 51,300 $8.79
Exercised (900) 9.73
-------------------
Balances, December 31, 2000 0 50,400 8.87
Exercised (36,000) 10.20
-------------------
Balances, December 31, 2001 0 14,400 5.51
===================
As of December 31, 2001, the 14,400 options outstanding have exercise prices
ranging from $4.50 to $8.17 and a weighted-average remaining contractual life of
9.6 years. The options granted under the 1987 Plan are fully vested.
Under Horizon's 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan),
which is accounted for in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations, Horizon may grant certain officers and employees stock option
awards or stock appreciation rights which vest and become fully exercisable at
the end of five years of continued employment. SARs entitle eligible employees
to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock
covered by the option over the option exercise price. The underlying stock
options are deemed to have been exercised upon exercise of the SARs. During 2000
Horizon authorized the grant of options and SARs for 47,800 shares of common
stock. Horizon recorded compensation expense of $671,000 related to the 1997
plan in 2001. There was no compensation expense related to the 1997 plan in 2000
or 1999.
A summary of transactions for the plan follows:
SHARES
---------------------- WEIGHTED-
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
----------------------------------------
Balances, January 1, 1999 234,000 36,000 $20.00
Granted (81,600) 81,600 $16.43
Forfeitures
------- ------
Balances, December 31, 1999 152,400 117,600 17.33
Granted (143,400) 143,400 11.70
Forfeitures 46,800 (46,800) 15.12
------- ------
Balances, December 31, 2000 55,800 214,200 13.92
Granted (55,800) 55,800 9.64
Forfeitures 3,000 (3,000) 16.56
------- ------
Balances, December 31, 2001 3,000 267,000 12.96
===== =======
As of December 31, 2001, the 267,000 options outstanding have an exercise price
ranging from $9.33 to $20.00 and a weighted average remaining contractual life
of 18.0 years. The options granted under the 1997 plan vest at a rate of 20% per
year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
40 HORIZON BANCORP & SUBSIDIARIES
NOTE 17-- FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts were determined using available market
information, current pricing information applicable to Horizon and various
valuation methodologies. Where market quotations were not available,
considerable management judgement was involved in the determination of estimated
fair values. Therefore, the estimated fair value of financial instruments shown
below may not be representative of the amounts at which they could be exchanged
in a current or future transaction. Due to the inherent uncertainties of
expected cash flows of financial instruments, the use of alternate valuation
assumptions and methods could have a significant effect on the derived estimated
fair value amounts.
The estimated fair values of financial instruments, as shown below, are not
intended to reflect the estimated liquidation or market value of Horizon taken
as a whole. The disclosed fair value estimates are limited to Horizon's
significant financial instruments at December 31, 2001 and 2000. These include
financial instruments recognized as assets and liabilities on the consolidated
balance sheet as well as certain off-balance sheet financial instruments. The
estimated fair values shown below do not include any valuation of assets and
liabilities which are not financial instruments as defined by SFAS No. 107
Disclosures about Fair Value of Financial Instruments, such as the value of real
property, the value of core deposit intangibles, the value of mortgage servicing
rights, nor the value of anticipated future business.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS -- The carrying amounts approximate fair value.
INTEREST-BEARING DEPOSITS -- The carrying amounts approximate fair value.
INVESTMENT SECURITIES -- For debt and marketable equity securities available for
sale and held to maturity, fair values are based on quoted market prices or
dealer quotes. For those securities where a quoted market price is not
available, carrying amount is a reasonable estimate of fair value based upon
comparison with similar securities.
NET LOANS -- The fair value of portfolio loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The carrying amounts of loans held for sale approximate fair value.
INTEREST RECEIVABLE/PAYABLE -- The carrying amounts approximate fair value.
FHLB AND FRB STOCK -- Fair value of FHLB and FRB stock is based on the price at
which it may be resold to the FHLB and FRB.
DEPOSITS -- The fair value of demand deposits, savings accounts,
interest-bearing checking accounts, and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future cash flows using
rates currently offered for deposits of similar remaining maturity.
SHORT-TERM BORROWINGS -- The carrying amounts approximate fair value.
FEDERAL HOME LOAN BANK ADVANCES -- Rates currently available to the Bank for
debt with similar terms and remaining maturities are used to estimate fair value
of existing advances.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTER OF CREDIT -- The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 41
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the counterparties at
the reporting date. Due to the short-term nature of these agreements, carrying
amounts approximate fair value.
The estimated fair values of Horizon's financial instruments are as follows:
2001 2000
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 18,628 $ 18,628 $ 35,051 $ 35,051
Interest-bearing deposits 247 247 238 238
Investment securities available for sale 67,338 67,338 71,375 71,375
Loans including loans held for sale, net 468,207 470,936 392,951 401,903
Interest receivable 3,209 3,209 3,301 3,301
Stock in FHLB and FRB 6,738 6,738 6,239 6,239
Liabilities
Noninterest-bearing deposits 43,353 43,353 30,044 30,044
Interest-bearing deposits 376,246 379,093 356,304 356,700
Short-term borrowings 22,344 22,344 34,148 34,148
Federal Home Loan Bank advances 105,293 106,962 75,320 76,123
Interest payable 765 765 1,015 1,015
NOTE 18-- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of Horizon Bancorp:
Condensed Balance Sheets
DECEMBER 31 2001 2000
- ------------------------------------------------------------------------------
Assets
Total cash and cash equivalents $ 210 $ 903
Investment in Bank 36,130 32,094
Investment in Insurance Company 469 406
Investment securities, net 241
Dividends receivable from Bank 300
Other assets 639 1,488
------ ------
Total assets $37,748 $35,132
======= =======
Liabilities
Short-term borrowings $ 2,000 $ 2,750
Other liabilities 805 758
Equity receivable from contributions and
dividends to Stock Bonus Plan 6,676
Stockholders' equity 34,943 24,948
------ ------
Total liabilities and stockholders' equity $37,748 $35,132
======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
42 HORIZON BANCORP & SUBSIDIARIES
Condensed Statements of Income
YEAR ENDED DECEMBER 31 2001 2000 1999
- --------------------------------------------------------------------------------------------
Operating Income (Expense)
Dividend income from Bank $ 600 $2,750 $1,150
Investment income 28 39 115
Other income 26 44 16
Interest expense (165) (224)
Employee benefit expense (163) (200) (2,819)
Other expense (35) (85) (102)
--- --- ----
Income (loss) before distributed income of subsidiaries 291 2,324 (1,640)
Undistributed income of subsidiaries 3,725 1,290 820
----- ----- ---
Income (loss) before tax 4,016 3,614 (820)
Income tax benefit 109 169 466
--- --- ---
Net income (loss) $4,125 $3,783 $ (354)
====== ====== ======
Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $4,125 $3,783 $ (354)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Equity in undistributed net income of Bank (3,662) (1,221) (912)
Equity in undistributed net income of Insurance Company (63) (55) (71)
Distributions in excess of (equity in undistributed)
net income of The Loan Store (14) 163
Additional paid-in capital from release of ESOP shares 1,807
Investment securities gains (2)
Change in
Income taxes receivable 377 364 744
Dividends receivable from Bank (300) 300 250
Other assets 445 (412) 5,538
Other liabilities 47 (186) 127
-- ---- ---
Net cash provided by operating activities 967 2,559 7,292
--- ----- -----
Investing Activities
Investment in Bank (2,500)
Proceeds from sales of securities available for sale 317
--- ----- -----
Net cash provided (used) by investing activities 317 (2,500)
--- ----- -----
Financing Activities
Dividends paid (1,179) (1,228) (1,218)
Change in short-term borrowings (750) 250 2,500
Reissuance of treasury stock 60
Purchase of treasury stock (48) (1,200) (7,619)
--- ----- -----
Net cash used by financing activities (1,977) (2,118) (6,337)
------ ----- -----
Net Change in Cash and Cash Equivalents (693) 441 (1,545)
Cash and Cash Equivalents at Beginning of Year 903 462 2,007
--- ----- -----
Cash and Cash Equivalents at End of Year $ 210 $ 903 $ 462
===== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
HORIZON BANCORP & SUBSIDIARIES 43
NOTE 19-- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain quarterly results for the years ended
December 31, 2001 and 2000:
AVERAGE NET INCOME
SHARES PER
NET PROVISION OUTSTANDING SHARE
QUARTER INTEREST INTEREST INTEREST FOR LOAN NET (BASIC AND (BASIC AND
ENDED INCOME EXPENSE INCOME LOSSES INCOME DILUTED) DILUTED)
- ------------------------------------------------------------------------------------------------------------------------
03-31-01 $ 10,501 $ 6,012 $ 4,489 $ 352 $ 938 1,985,943 $ .47
06-30-01 10,443 5,545 4,898 353 1,053 1,985,784 .53
09-30-01 9,850 4,972 4,878 300 1,124 1,985,784 .57
12-31-01 9,983 4,441 5,542 500 1,010 1,984,334 .51
----- ----- ----- --- ----- ---
$ 40,777 $ 20,970 $ 19,807 $ 1,505 $ 4,125 1,985,458 $2.08
======== ======== ======== ======= ======= =====
03-31-00 $ 9,896 $ 5,442 $ 4,454 $ 503 $ 782 2,066,925 $ .38
06-30-00 10,287 5,453 4,834 502 1,057 2,068,266 .51
09-30-00 10,899 6,174 4,725 503 1,213 2,057,211 .59
12-31-00 10,871 6,230 4,641 502 731 2,002,596 .37
----- ----- ----- --- ----- --------- ---
$ 41,953 $ 23,299 $ 18,654 $ 2,010 $ 3,783 2,048,649 $1.85
======== ======== ======== ======= ======= ========= =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands)
44 HORIZON BANCORP & SUBSIDIARIES
Independent Accountants' Report
To the Stockholders and
Board of Directors
Horizon Bancorp
Michigan City, Indiana
We have audited the consolidated balance sheets of Horizon Bancorp as of
December 31, 2001 and 2000 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of Horizon's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Horizon
Bancorp as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
BKD, LLP
Merrillville, Indiana
February 1, 2002
INDEPENDENT ACCOUNTANTS' REPORT
HORIZON BANCORP & SUBSIDIARIES 45
Management's Report on Financial Statements
Management is responsible for the preparation and presentation of the financial
statements and related notes on the preceding pages. The statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America appropriate in the circumstances and include amounts
that are based on management's best estimates and judgments. Financial
information elsewhere in the Annual Report is consistent with that in the
consolidated financial statements.
In meeting its responsibility for the accuracy of the consolidated financial
statements, management relies on Horizon's system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are properly recorded to permit the preparation
of appropriate financial information. The system of internal controls is
supplemented by a program of internal audits to independently evaluate the
adequacy and application of financial and operating controls and compliance with
Company policies and procedures.
The Audit Committee of the Board of Directors meets periodically with
management, the independent accountants and the internal auditors to ensure that
each is properly discharging its responsibilities with regard to the
consolidated financial statements and internal accounting controls. The
independent accountants have full and free access to the Audit Committee and
meet with it to discuss auditing and financial reporting matters.
The consolidated financial statements in the Annual Report have been audited by
BKD, LLP, independent public accountants, for 2001, 2000, and 1999. Their audits
were conducted in accordance with auditing standards generally accepted in the
United States of America and included a consideration of internal accounting
controls, tests of accounting records and other audit procedures to the extent
necessary to allow them to express their opinion on the fairness of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America.
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS (Table dollar amounts in thousands)
46 HORIZON BANCORP & SUBSIDIARIES
Horizon's Common Stock and Related Stockholders' Matters
Horizon common stock is traded on the NASDAQ SmallCap market under the symbol
"HBNC." The following table sets forth, for the periods indicated, the high and
low prices per share. Also summarized below are the cash dividends declared by
quarter for 2001 and 2000. All amounts in the table have been adjusted for the
three-for-one stock split declared October 16, 2001.
2001
------------------------------------
COMMON STOCK BID PRICES DIVIDENDS
----------------------- DECLARED
HIGH LOW PER SHARE
-----------------------------------
First Quarter $12.67 $ 9.21 $ .15
Second Quarter 14.17 12.33 .15
Third Quarter 14.33 13.50 .15
Fourth Quarter 23.50 14.17 .15
2000
------------------------------------
COMMON STOCK BID PRICES DIVIDENDS
----------------------- DECLARED
HIGH LOW PER SHARE
------------------------------------
First Quarter $14.00 $10.33 $ .15
Second Quarter 10.67 9.50 .15
Third Quarter 10.67 9.58 .15
Fourth Quarter 10.42 9.17 .15
There can be no assurance as to the amount of future dividends on Horizon common
stock since future dividends are subject to the discretion of the Board of
Directors, cash needs, general business conditions and dividends from the bank
subsidiary.
The approximate number of holders of outstanding common stock, based upon the
number of record holders as of December 31, 2001, is 628.
Form 10-K
Horizon will provide without charge to each stockholder upon written request to
Mary McColl, Shareholder Relations, Horizon Bancorp, 515 Franklin Square,
Michigan City, Indiana 46360, a copy of Horizon's Annual Report on Form 10-K,
including the Financial Statements and schedules thereto required to be filed
with the Securities and Exchange Commission for Horizon's most recent fiscal
year.
HORIZON'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS
HORIZON BANCORP & SUBSIDIARIES 47
BOARD OF DIRECTORS DIRECTORS EMERITUS
Susan D. Aaron John A. Garrettson
Retired Executive Retired
Past Chairman of Horizon Bancorp
Dale W. Alspaugh
Chancellor Emeritus Larry E. Reed
Purdue University North Central Retired
Past Chairman of Horizon Bancorp
George R. Averitt(*)
Adjunct Faculty Burton B. Ruby
Purdue University North Central Chairman of Jaymar Ruby, Inc.
Former publisher of the
Michigan City News Dispatch Executive Officers
Robert C. Dabagia
Robert C. Dabagia Chairman
Chairman
Horizon Bancorp Craig M. Dwight
President & Chief Executive Officer
Craig M. Dwight
President & Chief Executive Officer Thomas H. Edwards
Horizon Bancorp Executive Vice President
Charley E. Gillispie James H. Foglesong
Vice President Administration & Chief Financial Officer
Valparaiso University
Lawrence J. Mazur
Robert E. McBride, M.D. Corporate Secretary
Pathologist
Pathology Consultants, Inc. Investor Information
For more copies of this report,
Larry N. Middleton current stock quotes and other investor
President inquiries, call (219) 874-9272.
Century 21 Middleton Company,
TRANSFER AGENT
Peter L. Pairitz Registrar and Transfer Company
Business Developer 10 Commerce Drive
Cranford, New Jersey 07016-3572
Bruce E. Rampage 1-800-368-5948
President & Chief Executive Officer
St. Anthony Memorial Health
Gene L. Rice
Retired Farmer
Robert E. Swinehart
President & Chief Operating Officer
Emerson Power Transmission Corp.
Spero W. Valavanis
Owner / Architect
Design Organization, Inc.
(*)Director of Horizon Bank only
48
HORIZON BANCORP
(Holding Company)
Robert C. Dabagia
Chairman
Craig M. Dwight
President & Chief Executive Officer
Thomas H. Edwards
Executive Vice President
James H. Foglesong
Chief Financial Officer
Lawrence J. Mazur
Secretary
SUBSIDIARIES
HORIZON BANK, N.A.
(Holding Company Subsidiary)
Craig M. Dwight
President & Chief Executive Officer
Thomas H. Edwards
Executive Vice President
HORIZON INSURANCE SERVICES, INC.
(Bank Subsidiary)
Robert W. Lindenmeyer
President
HORIZON TRUST & INVESTMENT MANAGEMENT, N.A.
(Bank Subsidiary)
Lawrence J. Mazur
President
HBC INSURANCE GROUP, INC.
(Holding Company Subsidiary)
Craig M. Dwight
President & Chief Executive Officer
49