HORIZON BANCORP
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
450 5th Street N.W.
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 879-0211
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
3,046,122 at November 3, 2004
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
(All Share and Per Share Amounts Have Been Adjusted
for a 3 for 2 Stock Split Declared October 21, 2003)
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
------------ ------------
ASSETS
Cash and due from banks $ 17,911 $ 28,434
Interest-bearing demand deposits 100 30
Federal funds sold 14,000 17,000
------------ -------------
Cash and cash equivalents 32,011 45,464
Interest-bearing deposits 27,118 9,135
Investment securities, available for sale 205,972 215,695
Loans held for sale 1,811 8,213
Loans, net of allowance for loan losses of $7,031 and $6,909 497,528 440,809
Premises and equipment 17,390 16,460
Federal Reserve and Federal Home Loan Bank stock 11,202 10,853
Interest receivable 4,029 3,769
Other assets 19,008 7,045
------------ -------------
Total assets $ 816,069 $ 757,443
============ =============
LIABILITIES
Deposits
Noninterest bearing $ 59,880 $ 71,157
Interest bearing 551,238 475,011
------------ -------------
Total deposits 611,118 546,168
Short-term borrowings 23,880 20,241
Federal Home Loan Bank advances 113,155 125,972
Subordinated debentures 12,372 12,372
Interest payable 731 751
Other liabilities 4,994 5,716
------------ -------------
Total liabilities 766,250 711,220
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value
Authorized, 1,000,000 shares
No shares issued
Common stock, $.2222 stated value
Authorized, 22,500,000 shares
Issued, 4,778,608 and 4,684,095 shares 1,062 1,041
Additional paid-in capital 22,729 20,994
Retained earnings 41,637 37,638
Restricted stock, unearned compensation (1,025)
Accumulated other comprehensive income 1,789 2,075
Less treasury stock, at cost, 1,732,486 and 1,698,881 shares (16,373) (15,525)
------------ -------------
Total stockholders' equity 49,819 46,223
------------ -------------
Total liabilities and stockholders' equity $ 816,069 $ 757,443
============ =============
See notes to condensed consolidated financial statements
2
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(All Share and Per Share Amounts Have Been Adjusted
for a 3 for 2 Stock Split Declared October 21, 2003)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- --------------------------
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ----------- ----------- -----------
INTEREST INCOME
Loans receivable $ 8,411 $ 9,431 $ 24,338 $ 26,681
Investment securities
Taxable 1,641 1,115 5,195 3,404
Tax exempt 566 553 1,699 1,453
------------ ----------- ----------- -----------
Total interest income 10,618 11,099 31,232 31,538
------------ ----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,609 2,542 7,817 7,538
Federal funds purchased and
short-term borrowings 94 142 274 322
Federal Home Loan Bank advances 1,358 1,663 4,177 4,749
Subordinated debentures 156 146 462 453
------------ ----------- ----------- -----------
Total interest expense 4,216 4,493 12,730 13,062
------------ ----------- ----------- -----------
NET INTEREST INCOME 6,402 6,606 18,502 18,476
Provision for loan losses 207 300 681 1,050
------------ ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,195 6,306 17,821 17,426
------------ ----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 807 818 2,308 2,346
Fiduciary activities 595 610 1,930 1,797
Commission income from insurance
agency 56 66 329 201
Income from reinsurance company 19 14 48
Gain on sale of loans 770 1,116 1,713 3,327
Loss on sale of securities (267) (273)
Other income 633 466 1,732 1,229
------------ ----------- ----------- -----------
Total other income 2,861 2,828 8,026 8,675
------------ ----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 3,903 3,662 10,838 10,366
Net occupancy expenses 461 428 1,382 1,299
Data processing and equipment
expenses 498 499 1,487 1,522
Other expenses 1,777 1,700 5,290 5,059
------------ ----------- ----------- -----------
Total other expenses 6,639 6,289 18,997 18,246
------------ ----------- ----------- -----------
INCOME BEFORE INCOME TAX 2,417 2,845 6,850 7,855
Income tax expense 654 817 1,767 2,328
------------ ----------- ----------- -----------
Net Income $ 1,763 $ 2,028 $ 5,083 $ 5,527
============ =========== =========== ===========
BASIC EARNINGS PER SHARE $ .59 $ .68 $ 1.70 $ 1.86
DILUTED EARNINGS PER SHARE $ .56 $ .65 $ 1.63 $ 1.78
See notes to condensed consolidated financial statements.
3
HORIZON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Table Dollar Amounts in Thousands)
RESTRICTED ACCUMULATED
ADDITIONAL STOCK, OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED UNEARNED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS COMPENSATION INCOME STOCK TOTAL
-------- --------- ------------- -------- ------------ ------------- -------- -----
BALANCES, DECEMBER
31, 2003 $ 1,041 $ 20,994 $ 37,638 $ 2,075 $(15,525) $46,223
Net income $ 5,083 5,083 5,083
Other comprehensive
income, net of tax,
unrealized losses on
securities (286) (286) (286)
---------
Comprehensive income $ 4,797
=========
Exercise of
stock options 11 434 445
Tax benefit related to
stock options 251 251
Purchase treasury stock (848) (848)
Issuance of restricted
stock 10 1,050 $ (1,060)
Amortization of unearned
compensation 35 35
Cash dividends ($.36 per
share) (1,084) (1,084)
-------- ---------- -------- -------- -------- ---------- -------
BALANCES, SEPTEMBER 30,
2004 1,062 $ 22,729 $ 41,637 $ (1,025) $ 1,789 $ (16,373) $49,819
======== ========== ======== ======== ======== ========== =======
See notes to condensed consolidated financial statements.
4
HORIZON BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income $ 5,083 $ 5,527
Items not requiring (providing) cash
Provision for loan losses 681 1,050
Depreciation and amortization 1,132 1,133
Federal Home Loan Bank stock dividend (349) (203)
Mortgage servicing rights (recovery) impairment (138) 127
Deferred income tax 594 (839)
Investment securities amortization, net 364 826
Gain on sale of loans (1,713) (3,327)
Proceeds from sales of loans 96,788 195,125
Loans originated for sale (88,673) (182,492)
Gain on sale of other real estate owned (12) (34)
Deferred loan fees 20 (21)
Unearned income (201) (311)
Loss on sale of securities 273
Loss on sale of fixed assets 3 4
Increase in cash surrender value of life insurance (414)
Net change in
Interest receivable (260) (322)
Interest payable (20) (93)
Other assets 82 741
Other liabilities (722) 675
---------- ----------
Net cash provided by operating activities 12,245 17,839
---------- ----------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (17,983) (25)
Purchases of securities available for sale (79,753) (163,051)
Proceeds from maturities, calls, and principal repayments of securities
available for sale 88,674 52,749
Proceeds from sale of securities 27,178
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (2,199)
Net change in loans (57,472) 76,302
Proceeds from sale of fixed assets 43
Recoveries on loans previously charged-off 253 219
Proceeds from sale of other real estate owned 77 215
Purchases of premises and equipment (2,073) (817)
Purchase of bank owned life insurance (12,000)
---------- ----------
Net cash used in investing activities (80,234) (9,429)
---------- ----------
FINANCING ACTIVITIES
Net change in
Deposits 64,950 45,941
Short-term borrowings 3,639 (3,845)
Federal Home Loan Bank advance 63,300 152,998
Repayment of Federal Home Loan Bank advance (76,117) (164,138)
Proceeds from issuance of stock
Issuance of stock 696 119
Purchase of treasury stock (848)
Dividends paid (1,084) (953)
---------- ----------
Net cash provided by financing activities 54,536 30,122
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,453) 38,532
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,011 $ 74,224
========== ==========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 12,736 $ 13,141
Income tax paid 903 2,600
See notes to condensed consolidated financial statements.
5
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A.
(Bank), and HBC Insurance Group, Inc. (Insurance Company). All intercompany
balances and transactions have been eliminated. The results of operations for
the periods ended September 30, 2004 and September 30, 2003 are not necessarily
indicative of the operating results for the full year of 2004 or 2003. The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments that are, in the opinion of Horizon's management, necessary to
fairly present the financial position, results of operations and cash flows of
Horizon for the periods presented. Those adjustments consist only of normal
recurring adjustments.
Certain information and note disclosures normally included in Horizon's annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Horizon's Form
10-K annual report for 2003 filed with the Securities and Exchange Commission.
The consolidated balance sheet of Horizon as of December 31, 2003 has been
derived from the audited balance sheet of Horizon as of that date.
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. In August 2002,
substantially all of the participants in Horizon's Stock Option and Stock
Appreciation Rights Plans voluntarily entered into an agreement with Horizon to
cap the value of their stock appreciation rights (SARS) at $14.67 per share and
cease any future vesting of the SARS. These agreements with option holders make
it more advantageous to exercise an option rather than a SAR whenever Horizon's
stock price exceeds $14.67 per share, therefore the option becomes potentially
dilutive at $14.67 per share or higher. The number of shares used in the
computation of basic earnings per share is 2,991,203 and 2,976,846 for the
nine-month period ended September 30, 2004 and 2003. The number of shares used
in the computation of diluted earnings per share is 3,120,813 and 3,099,729 for
the nine month period ended September 30, 2004 and 2003. All share and per share
amounts have been adjusted for a three for two stock split declared October 21,
2003.
6
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Horizon accounts for the stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost related to the option plans is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. Compensation cost related to
restricted stock awards is reflected in net income. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to the stock option plans.
THREE MONTHS ENDED SEPTEMBER 30 2004 2003
- ------------------------------- ------------ ------------
Net income, as reported $ 1,763 $ 2,028
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (16) (11)
------------ ------------
Pro forma net income $ 1,747 $ 2,017
============ ============
Earnings per share
Basic - as reported $ .59 $ .68
Basic - pro forma .58 .68
Diluted - as reported .56 .65
Diluted - pro forma .56 .65
NINE MONTHS ENDED SEPTEMBER 30 2004 2003
- ------------------------------- ------------ ------------
Net income, as reported $ 5,083 $ 5,527
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (106) (75)
------------ ------------
Pro forma net income $ 4,977 $ 5,452
============ ============
Earnings per share
Basic - as reported $ 1.70 $ 1.86
Basic - pro forma 1.66 1.83
Diluted - as reported 1.63 1.78
Diluted - pro forma 1.59 1.76
NOTE 2 - INVESTMENT SECURITIES
2004
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
SEPTEMBER 30 AMORTIZED COST GAINS LOSSES VALUE
- ------------ -------------- --------- ---------- -----
Available for sale
U. S. Treasury and federal agencies $ 51,205 $ 27 $ (350) $ 50,882
State and municipal 55,717 2,655 (41) 58,331
Federal agency collateralized mortgage
obligations 12,448 29 (9) 12,468
Federal agency mortgage backed pools 83,249 855 (465) 83,639
Corporate Notes 600 52 652
------------- ---------------- ---------------- -------------
Total investment securities $ 203,219 $ 3,618 $ (865) $ 205,972
============= ================ ================ =============
7
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
2003
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
----------- --------- ---------- ---------- -----
Available for sale
U. S. Treasury and federal agencies $ 66,945 $ 196 $(369) $ 66,772
State and Municipal 57,799 2,482 (51) 60,230
Federal agency collateralized mortgage obligations 14,354 176 (42) 14,488
Federal agency mortgage backed pools 72,806 747 (7) 73,546
Corporate notes 600 59 659
-------- ------ ----- --------
Total investment securities $212,504 $3,660 $(469) $215,695
======== ====== ===== ========
The amortized cost and fair value of securities available for sale at September
30, 2004, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE
------------------------
AMORTIZED FAIR
COST VALUE
--------- --------
Within one year $ 1,958 $ 1,995
One to five years 50,223 50,135
Five to ten years 11,669 11,901
After ten years 43,672 45,834
-------- --------
107,522 109,865
Federal agency collateralized mortgage obligations 12,448 12,468
Federal agency mortgage backed pools 83,249 83,639
-------- --------
$203,219 $205,972
======== ========
Realized net gains and (losses) on the sale of securities available for sale are
summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------- -----
Realized gains $ 140
Realized losses (413)
-----
Net realized losses $(273)
=====
There were no sales of securities available for sale during the nine months
ending September 30, 2004.
8
HORIZON BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 - LOANS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Commercial loans $ 187,536 $ 152,362
Mortgage warehouse loans 107,688 126,056
Real estate loans 77,961 67,428
Installment loans 131,374 101,872
--------- ---------
504,559 447,718
Allowance for loan losses (7,031) (6,909)
--------- ---------
Total loans $ 497,528 $ 440,809
========= =========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Allowance for loan losses
Balances, beginning of period $ 6,909 $ 6,255
Provision for losses, operations 681 1,350
Recoveries on loans 253 288
Loans charged off (812) (984)
------- -------
Balances, end of period $ 7,031 $ 6,909
======= =======
NOTE 5 - NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31
2004 2003
------------- -----------
Nonperforming loans $1,480 $1,707
Other real estate owned 345
------ ------
Total nonperforming assets $1,825 $1,707
====== ======
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HORIZON BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
FORWARD - LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp
("Horizon" or "Company") and Horizon Bank, N.A. (Bank) and Horizon's other
subsidiaries. Horizon intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for the
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of Horizon, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. Horizon's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on Horizon's future activities and operating results include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative and regulatory changes, U.S. monetary and fiscal policies, demand
for products and services, deposit flows, competition and accounting policies,
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
INTRODUCTION
The purpose of this discussion is to focus on Horizon's financial condition,
changes in financial condition and the results of operations in order to provide
a better understanding of the consolidated financial statements included
elsewhere herein. This discussion should be read in conjunction with the
consolidated financial statements and the related notes. All share and per share
amounts have been adjusted for a three for two stock split declared October 21,
2003.
OVERVIEW
For the first nine months of 2004, as anticipated, Horizon has experienced a
decline in residential lending ACTIVITY. Therefore, gain on sale of loans and
certain other categories of fee related to both the mortgage warehouse division
and internal residential lending activities declined. Offsetting this decline,
the commercial and consumer loan portfolios have experienced strong growth of
23% and 29% respectively since December 31, 2003. This growth is primarily
attributed to expansion of lending activities into new markets.
Net interest income is relatively constant compared to the same period of the
prior year as growth in earning assets was offset by a decline in net interest
margin.
Other non-interest income has increased primarily due to income recognized from
the purchase of bank owned life insurance in early January of 2004 and the
improvement of the value of mortgage servicing rights due to the slow down in
mortgage loan prepayment speeds. The bank owned life insurance income is
considered tax exempt income, thereby reducing the effective tax rate for the
year.
Non-interest has increased approximately 4.1% due primarily to expansion into
new markets and increased cost of employee benefits.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements included in Item 8 on Form
10-K contain a summary of the Company's significant accounting policies and are
presented on pages 38-42 of Form 10-K for 2003. Certain of these policies are
important to the portrayal of the Company's financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain. Management has
identified the allowance for loan losses as a critical accounting policy.
An allowance for loan losses is maintained to absorb loan losses inherent in the
loan portfolio. The determination of the allowance for loan losses is a critical
accounting policy that involves management's ongoing quarterly assessments of
the probable estimated losses inherent in the loan portfolio. Horizon's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans, and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments. Loss factors are based on historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The conditions evaluated in
connection with the unallocated allowance may include factors such as local,
regional, and national economic conditions and forecasts; and adequacy of loan
policies and internal controls; the experience of the lending staff; bank
regulatory examination results; and changes in the composition of the portfolio.
Horizon considers the allowance for loan losses of $7.031 million adequate to
cover losses inherent in the loan portfolio as of September 30, 2004. However,
no assurance can be given that Horizon will not, in any particular period,
sustain loan losses that are significant in relation to the amount reserved, or
that subsequent evaluations of the loan portfolio, in light of factors then
prevailing, including economic conditions and management's ongoing quarterly
assessments of the portfolio, will not require increases in the allowance for
loan losses.
FINANCIAL CONDITION
Liquidity
The Bank maintains a stable base of core deposits provided by long standing
relationships with consumers and local businesses. These deposits are the
principal source of liquidity for Horizon. Other sources of liquidity for
Horizon include earnings, loan repayment, investment security sales and
maturities, sale of real estate loans and borrowing relationships with
correspondent banks, including the Federal Home Loan Bank (FHLB). During the
nine months ended September 30, 2004, cash and cash equivalents decreased by
approximately $13.5 million. These funds were used to increase loans
outstanding. At September 30, 2004, in addition to liquidity provided from the
normal operating, funding, and investing activities of Horizon, the Bank has
available approximately $116 million in unused credit lines with various money
center banks including the FHLB.
There have been no other material changes in the liquidity of Horizon from
December 31, 2003 to September 30, 2004.
11
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios
for "well capitalized" banks at September 30, 2004. Stockholders' equity totaled
$49.819 million as of September 30, 2004 compared to $46.223 million as of
December 31, 2003. The change in stockholders' equity during the nine months
ended September 30, 2004 is the result of net income, net of dividends declared,
a decrease in the market value of investment securities available for sale,
purchase of treasury stock and the issuance of new shares related to the
exercise of stock options. At September 30, 2004, the ratio of stockholders'
equity to assets was 6.10% compared to 6.11% at December 31, 2003.
During the course of a periodic examination by the Bank's regulators that
commenced in February 2003, the examination personnel raised the issue of
whether the Bank's mortgage warehouse loans should be treated as other loans
rather than home mortgages for call report purposes. If these loans are treated
as other loans for regulatory reporting purposes, it would change the
calculations for risk-based capital and reduce the Bank's risk-based capital
ratios. Management believes that it has properly characterized the loans in its
mortgage warehouse loan portfolio for risk-based capital purposes, but there is
no assurance that the regulators will concur with that determination. Should the
call report classification of the loans be changed, Horizon and the Bank would
still be categorized as well capitalized at September 30, 2004.
There have been no other material changes in Horizon's capital resources from
December 31, 2003 to September 30, 2004.
Material Changes in Financial Condition - September 30, 2004 compared to
December 31, 2003
During the first nine months of 2004, cash and cash equivalents decreased
approximately $13.5 million, and loans outstanding increased approximately $56.8
million. The decrease in cash and cash equivalents is related to decreases in
deposited items in the process of collection and overnight investments. Except
for mortgage warehouse loans, all lending categories experienced growth during
the period. Real estate loans increased due to adjustable rate mortgages held in
the Bank's portfolio instead of being sold into the secondary market. Commercial
loans increased primarily in loans secured by commercial real estate and
commercial term loans with new customer relationships. Installment loan growth
was primarily related to home equity loans and indirect automobile loans. Other
assets increased due to the acquisition of Bank Owned Life Insurance.
Deposits increased approximately $64.9 million during the first nine months of
2004. Noninterest bearing deposits decreased primarily from corporate and public
fund deposits which moved to interest bearing categories. The growth in interest
bearing deposits, occurred primarily in Money Market Accounts and public fund
and brokered Certificates of Deposit acquired to fund the growth in earning
assets during the first nine months of 2004.
Short-term borrowings increased approximately $3.6 million to fund the growth in
total loans outstanding. FHLB advances decreased approximately $12.8 million due
the maturity of short-term advances. Horizon continues to monitor funding
sources to reduce the cost of funds and maintain adequate liquidity. There have
been no other material changes in the financial condition of Horizon from
December 31, 2003 to September 30, 2004.
On October 21, 2004, Horizon raised $10 million of additional capital through a
private placement of trust preferred securities. The trust preferred securities
will mature in 30 years and bear an initial interest rate of 4.05% per annum.
The rate will adjust quarterly to three-month LIBOR plus 1.95%. Horizon expects
to use the net proceeds from the offering for general corporate purposes,
including providing funding for new market expansion and leveraging the
additional Tier 1 capital through expansion of the investment portfolio.
12
RESULTS OF OPERATIONS
Material Changes in Results of Operations - Nine months ended September 30, 2004
compared to the nine months ended September 30, 2003
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
During the nine months ended September 30, 2004, net income totaled $5.083
million or $1.63 per diluted share compared to $5.527 million or $1.78 per
diluted share for the same period in 2003.
Net interest income was $18.502 million for the nine months ended September 30,
2004, compared to $18.476 million for the same period of 2003. Average earning
assets increased to $745 million for the nine month period ended September 30,
2004 from $701 million for the same period of the prior year. The net interest
margin for the same period of both years declined to 3.37% for the 2004 period,
from 3.58% for the 2003 nine month period. The growth in average earning assets
came in the investment portfolio, which increased approximately $80 million on
average from the same period of the prior year, primarily in callable agency
securities, mortgage backed securities and tax exempt municipal securities.
Average loans outstanding decreased to $497 million from $522 million for the
first nine months of 2003. A decline in average mortgage warehouse loans to $135
million during the first nine months of 2004 from $251 million during the first
nine months of the prior year was partially offset by growth in the other loan
categories. Growth in average loans outstanding for the other loan categories
from the first nine months of 2003 compared to the first nine months of 2004 was
as follows: Commercial loans $47 million, Consumer loans $28 million,
residential real estate loans $16 million. The increase in the investment
portfolio was at lower yields, which caused the decline in net interest margin.
Also effecting net interest income was the investment of $12 million in Bank
Owned Life Insurance early in 2004. The income from this investment is treated
as noninterest income.
The provision for loans losses totaled $681 thousand for the nine months ended
September 30, 2004 compared to $1.050 million for the same period of the prior
year. The decrease in the provision is primarily due to continued favorable
nonperforming loan and charge-off experience.
Total noninterest income was $8.026 million for the nine months ended September
30, 2004 compared to $8.675 million for the same period in 2003. Gain on sale of
loans declined due to a reduction in mortgage origination volume as the total
loans sold during the first nine months declined from $195 million in 2003 to
$96 million in 2004, a 51% decline. Partially offsetting the decline in gain on
sale of loans is increased income from the Bank Owned Life Insurance and
recovery of impairment on the mortgage servicing asset.
Noninterest expense increased $751 thousand or 4.1% for the nine months ended
September 30, 2004 compared to the same period in 2003. The majority of the
increase relates to expansion into new markets and increased cost of employee
benefits.
There have been no other material changes in the results of operations of
Horizon for the nine months ending September 30, 2004 and 2003.
Material Changes in Results of Operations - Three months ended September 30,
2004 compared to the three months ended September 30, 2003
All share and per share amounts have been adjusted for a three for two stock
split declared October 21, 2003.
During the three months ended September 30, 2004, net income totaled $1.763
million or $.56 per diluted share compared to $2.028 million or $.65 per diluted
share for the same period in 2003.
Net interest income was $6.402 million for the three months ended September 30,
2004, compared to $6.606 million for the same period 2003. This decrease was the
result of a decrease in net interest
13
margin from 3.58% in the third quarter of 2003 to 3.43% in the current quarter.
The decrease was caused by a decrease in average mortgage warehouse loans
outstanding from $275 million in the third quarter of 2003 to $122 million in
the current quarter. These funds were re-deployed into other loan types and
investment securities, which carry lower yields than the mortgage warehouse
loans. Commercial loans increased from an average of $129.7 million for the
third quarter of 2003 to $179.9 million for the current quarter. Consumer loans
increased from an average of $91.7 million for the third quarter of 2003 to
$125.3 million for the third quarter of the current year. Average earning assets
were relatively constant from the third quarter of last year to this year;
however, due to the change in mix of earning assets, declines were experienced
in net interest margin and therefore net interest income.
The provision for loan losses totaled $207 thousand for the three months ended
September 30, 2004 compared to $300 thousand for the same period of the prior
year. The decrease in the provision is primarily due to continued favorable
nonperforming loan and charge-off experience. The allowance for loan losses to
total loans is 1.39% at September 30, 2004 compared to 1.54% at December 31,
2003.
Total non-interest income was $2.861 million for the three months ended
September 30, 2004, compared to $2.828 million for the same period in 2003. The
decline in gain on sale of loans was offset by increased income from bank owned
life insurance and no losses were recognized on the sale of securities in 2004
compared to a loss of $267 thousand recognized in the third quarter of 2003.
Noninterest expense increased $350 thousand or 5.6% for the three months ended
September 30, 2004 compared to the same period in 2003. The increase relates to
staffing and for new market expansion and increased cost of employee benefits.
There have been no other material changes in the results of operations of
Horizon for three months ending September 30, 2004 and 2003.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon currently does not engage in any derivative or hedging activity. Refer
to Horizon's 2003 Form 10-K for analysis of its interest rate sensitivity.
Horizon believes there have been no significant changes in its interest rate
sensitivity since it was reported in its 2003 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of disclosure controls and procedures as of September 30,
2004, Horizon's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of Horizon's disclosure controls (as defined in
Exchange Act Rule 13a-15(e)). Based on such evaluation, such officers have
concluded that, as of the evaluation date, Horizon's disclosure controls and
procedures are effective to ensure that the information required to be disclosed
by Horizon in the reports it files under the Exchange Act is gathered, analyzed
and disclosed with adequate timeliness, accuracy and completeness.
Changes In Internal Controls
Since the evaluation date, there have been no significant changes in Horizon's
internal controls or in other factors that could significantly affect such
controls.
15
HORIZON BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
There were no purchases by the Company of its common stock during the quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Horizon has posted its Code of Conduct for Executive Officers and
Directors and its Advisor Code of Conduct and Ethics on its web site at
www.accesshorizon.com
ITEM 6. EXHIBITS
Exhibits
Exhibit 11 Statement Regarding Computation of Per Share
Earnings
Exhibit 31.1 Certification of Craig M. Dwight
Exhibit 31.2 Certification of James H. Foglesong
Exhibit 32 Certification of Chief Executive and Chief
Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON BANCORP
11.9.2004 /s/ Craig M. Dwight
- --------- -------------------
Date BY: Craig M. Dwight
President and Chief Executive Officer
11.8.2004 /s/ James H. Foglesong
- --------- ----------------------
Date BY: James H. Foglesong
Chief Financial Officer
17
INDEX TO EXHIBITS
The following documents are included as Exhibits to this Report.
Exhibit
- -------
11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Craig M. Dwight
31.2 Certification of James H. Foglesong
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
18