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EXHIBIT 13
A REPORT TO OUR SHAREHOLDERS, OWNER-EMPLOYEES, CUSTOMERS AND COMMUNITY
This report to you, our stakeholders, provides us the opportunity to detail
several important aspects of Horizon Bancorp (Horizon) and its subsidiaries,
Horizon Bank, N.A. (Bank), IMS Investment Management, N.A. (IMS), HBC Insurance
Group, Inc. And The Loan Store, Inc. Enclosed you will find information on the
financial performance of Horizon, other operating results and our vision for the
future of Horizon financial services delivery. Horizon is a Michigan City,
Indiana based holding company that serves clients with offices in Northwest
Indiana. Horizon, through Bank, was established in 1873. At December 31, 1996
total corporate assets were $382.0 million and IMS assets under administration
were $405.5 million.
Horizon's principal businesses are commercial banking conducted through Bank and
investment and wealth creation services conducted through IMS, a national trust
bank chartered in 1996. In 1984, Horizon was formed as a one bank holding
company and in 1985, the employees of Horizon formed an Employee Stock Ownership
Plan which is also considered a bank holding company under the rules and
regulations of the Federal Reserve Bank. In 1994, HBC Insurance Group, Inc. was
chartered as a reinsurance company for the sale of credit life and accident and
health insurance on consumer loans. In 1995, The Loan Store, Inc. was charted as
a finance company. This subsidiary offers a wide variety of credit services to
consumers.
pg. 2 Financial Highlights
pg. 4 The Future of Financial Services Delivery
pg. 13 Management Discussion & Analysis
pg. 35 Financial Statements
pg. 64 Corporate Structure
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Horizon Bancorp Financial Highlights
1996 1995 % Change
---- ---- --------
OPERATING RESULTS
Net Interest Income 16,433 15,150 8.47%
Fees on Investment Management Activities 2,094 1,769 18.37%
Net Income 3,824 3,039 25.83%
Return on:
Average Total Assets 1.04% 0.86%
Average Shareholders Equity 11.67% 10.09%
Net Interest Margin (taxable equivalent) 4.87% 4.71%
BALANCE SHEET AND INVESTMENT MANAGEMENT
Total Loans 271,476 241,662 12.34%
Total Assets Under Management at Market Value 405,508 347,699 16.63%
Total Deposits 289,180 288,984 0.07%
Total Assets 382,038 368,013 3.81%
Shareholders Equity 33,508 32,371 3.51%
STOCK DATA (PER SHARE)
Earnings $5.19 $4.12 25.97%
Cash Dividends Declared 1.40 1.20 16.67%
Book Value 46.40 43.18
Market Value:
Period End - Bid 47.00 35.50
High 47.00 35.50
Low 35.63 30.00
Weighted Average Shares Outstanding 736,887 750,286
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The December 31 retirement of Bob Dabagia as President brought to close a
distinguished 35 year banking career, 17 years of which were with Horizon and
Citizens Bank. We are grateful to Bob for the contributions and dedication he
brought to Horizon. Bob played an important role in the successful
transformation of our company. His leadership, integrity and hard work earned
him a position of well-deserved prominence in our community. He has, and
continues to contribute generously of his time and expertise to many civic,
educational and charitable organizations.
We extend our deepest appreciation to Bob for his thoughtful contributions. His
vision and perseverance helped lay the foundation for the future of Horizon.
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THE FUTURE OF FINANCIAL SERVICES DELIVERY
We have been preparing Horizon Bancorp for the future of financial services. It
started with the vision to reinvent our culture. We know that the business of
banking is changing dramatically ..... and quickly. While many bankers see the
greatest competitive threat from other banks we see the competition coming from
non-bank competitors delivering non-traditional products and services.
While 1996 was a record year for net income, investment management growth, loan
growth, earnings per share and market price per share we still strive to reach
the higher levels of performance we believe this organization is capable of
achieving.
Horizon is building a leading market position in personal investment management,
small business lending, consumer lending and financial convenience by expanding
its atm network and a new approach to the delivery of financial services through
its newly created Horizon Technology Centers. The Horizon Technology Centers
include several self-service platforms such as automated loan machines,
financial planning models and automated merchant services.
Our business strategy also includes investing in our owner-employees through
extensive training programs to ensure we continue the level of outstanding
service needed to maintain our leading market position. Our strategy also
includes helping to build stronger communities by wisely investing resources -
human and financial - in sound programs and innovative partnerships. Horizon
owner-employees strive to make a positive difference in the lives of those who
live in the communities we serve.
In March 1997 we changed the name of First Citizens Bank, N.A. to Horizon Bank,
N.A. The name change reflects our renewed energy and purpose. Horizon Bank is
dedicated to greater choice and more convenience, to helping enhance the quality
of our customers lives and providing the opportunity to acquire a level of
wealth that will meet realistic goals through products and technology designed
to fit human needs. We believe Horizon Bank more accurately reflects the new
organization that has emerged.
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We acknowledge the inevitability of structural change driven by the marketplace
forces that have changed the basis, nature and intensity of competition for
customers. It is obvious to us that within five years the traditional bank will
no longer dominate its market. In its place will be a new kind of institution,
organized into discrete business units:
- wealth creation
- quality of life
- financial convenience.
Your company is being transformed from a single, integrated business requiring
only financial performance measures to a diversified financial services provider
requiring separate, yet interrelated business units requiring different
strategies, organization capabilities, performance standards and measurements.
We believe we are well prepared for the transformation.
To build and maintain market leadership, Horizon's business unit strategies
concentrate on these three distinct, yet interrelated concepts which are best
described in nontraditional terms. The following pages describe these concepts
and how they are incorporated into our business strategies with highlights of
the most noteworthy activities and initiatives that are taking place.
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Wealth Creation
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The primary economic force that is common to individuals and
households is their interest in acquiring a measurable and
sustainable level of wealth that will meet their realistic goals.
While banks have historically perceived themselves to be
collectors of deposits and makers of loans and in that process to
take some interest risk as a financial intermediary, in the past
two decades our most valued customers have sought out other
financial service providers who have articulated their roles as
wealth creators. In that process banks have moved from a position
of holding 80% of the financial assets of these customers to a
position of holding 20% today. That data demonstrates the urgent
need to bring wealth creation to the front of our design projects
when we create the architecture for products, delivery systems and
technology.
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While banks have not traditionally positioned themselves as providers of
sophisticated financial advisory services - we are changing that perception. In
late 1996 we moved our Trust Division into an autonomous business unit of
Horizon Bank named IMS Investment Management, N.A. IMS is a trust bank that
exclusively delivers wealth creation products and services. It does not make
loans or accept FDIC insured deposits of Horizon Bank. Its sole mission is to
create wealth for its clients.
This business unit holds great promise. IMS does not underestimate the
importance of the longer-term contest with nimbler and powerful nontraditional
financial service providers that have been steadily stealing customer "share of
wallet" - and show no signs of letting up.
We saw earlier than most the critical importance of developing Personal Trust at
the community bank level. U.S. demographic trends are favorable for the growth
of retirement assets and the substantial transition of wealth through
inheritance. IMS's risk management profile and strong investment standards will
enable us to expand this attractive niche as the larger personal trust providers
continue to substantially raise the minimum amount of investable assets they are
willing to manage.
The IMS Smart Rewards programs focuses on smaller investment account
relationships using a select list of mutual funds. Smart Rewards representatives
are already in many of our sales offices. This segment of our investment
management business should grow significantly as investors continue to seek
alternatives to traditional bank deposit products.
As a highly focused company, IMS has developed an effective business strategy
encompassing fiduciary, investment, custody and personal banking services.
Substantial investments in technology and training combined with highly skilled
professionals, have produced a business unit that well positions IMS for future
growth and expansion. Our relationship focus ensures that clients receive high
value services we can deliver profitably.
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Quality of Life
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A very close second to wealth creation is the desire by customers
to enjoy a high quality of life throughout their lifetime. Their
definitions of quality of life vary and change during their lives.
While we are not the determining influence as to how much they
earn in order to support their quality of life, we can play a
major role in the planning and use of financial supplements
(loans) that they use in managing their life style and quality of
life. We have already modified much of our role in this process
through credit scoring, automated loan machines and sales office
delivery. However, we must also design into these products the
features that give greater recognition to the lifestyle selection
of the customer.
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Lending and credit risk are inherent to the banking business. It has always been
necessary for us to understand and measure credit risk. Judgement has
traditionally been used in credit decisions for all loans - large and small
(whether it was needed or not). This usually meant that an underwriter needed to
be located in every sales office. Pricing was not risk based. The teenager with
a limited credit history getting her first car loan received the same interest
rate and terms as the two-wage family with an unblemished credit history.
We have changed this inefficient method of measuring and pricing credit risk for
consumer and residential lending. Our credit scoring systems have allowed
Horizon to significantly increase consumer loans and yield while maintaining
acceptable levels of delinquency and charge-offs.
In recent years Horizon has undertaken a very strong and consistent investment
in technology and sales training programs to better equip our representatives in
the credit approval process. These investments include implementation of the
scoring models mentioned above, documentation standards driven by credit score,
automated documentation preparation systems, rewriting policies and procedures
to align with the change in processes and providing the high level of training
needed to maintain an effective sales force that delivers responsive,
value-added credit services to our customers.
Our consumer finance company, The Loan Store, Inc., is performing and expanding
at expected levels. With locations in Highland, Merrillville and South Bend,
Indiana we expect this company to grow to six offices by 1998. This entity is
entirely consistent with our Quality of Life strategy. Consumer finance company
laws allow this company to expand into markets with greater ease and lower costs
than a traditional bank branch while at the same time providing stronger net
interest margins.
Our business lending unit is beginning to leverage many of the technologies we
initially employed in consumer credit risk analysis. With the emergence of
credit scoring models for small business and our proven use of pricing driven by
the credit score we expect to provide a higher level of responsiveness to
customer needs while at the same time lending at a rate of return based upon
expected future servicing needs and risk.
Mortgage lending is another business unit we expect to move into an autonomous
subsidiary in the near future. To effectively compete with the nontraditional
financial service providers we need to originate residential mortgage loans in
markets outside our traditional trade areas, sell them on the secondary markets
and either elect to retain or sell the servicing rights. Because this strategy
is not deposit growth dependent, the volume of loans we can originate and sell
is only limited by our ability to attract and retain an inspired sales force.
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Financial Convenience
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This sector of our business constitutes the activities that are
generally used most frequently and valued the least by customers.
This is the transfer of payment process, the collection of
deposits, teller sold items, help in balancing checkbooks, etc.
These are for the most part the services that are used most
frequently by 80% of our lobby customers.
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The emergence of the new consumers of the 1990s is profoundly changing the
structure and delivery of services to value-conscious consumers. No longer can
we gauge trends across mass markets. We need to offer products and services that
add value yet deliver them in a profitable individualized mix of product, price
and distribution points.
We are using technology to allow consumers access to information and service at
their convenience.
We have been working hard to abandon the "old" banking paradigm of catering to
all customers regardless of profitability. We agree with prominent banking
research companies who find that 200% of our profit comes from 20% of our
customers. The growing disaffection of our most profitable customers by either
leaving altogether or, more typically, rapidly reducing their balances will
ultimately result in lower profits.
We believe that services providers in the Financial Convenience arena cannot
provide one level of services that fits all. We are shifting service choices to
retain our most valuable customers while at the same time providing alternative
delivery choices for the 80% who are presently unprofitable.
To that end we have redesigned our consumer checking account products to provide
all customers with the opportunity to select the level of Financial Convenience
they need while at the same time expanding our numbers of profitable accounts.
Profitability aside, customers also want direct access to their financial
information. Many no longer have time to stop by for a chat with their banker.
They want information technology that allows them to perform commonly used
services at ATMs, voice response systems, automated loan machines and at home on
their PC.
Our new Horizon Technology Centers provide customers a sales-office based
platform that is accessible before and after scheduled office hours. This new
concept is being introduced at our new South Franklin office in Michigan City.
In it customers will find ATMs, an automated loan machine, financial planning
models, voice response system access, automated merchant services and even areas
where our customers of the future can play with personal computers equipped with
fun ways to learn about financial services.
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1997 and Beyond
Horizon's challenge will be to profitably offer products, services and delivery
that are consistent with our wealth creation, quality of life and financial
convenience strategies. Critical to meeting that challenge will be communicating
the business plan with and developing the business plan through every
owner-employee of Horizon. We have begun that process. We also place a very high
degree of importance in linking owner-employee training and development programs
to the business plan. We are successfully continuing that process. We also see
the development and distribution of technology that allows all customers to be
profitable at all levels of activity and balances critical to our success. We
acknowledge that implementing our business plan in an environment that continues
to favor less regulated non-bank competitors vying for the most profitable
customers in all three concepts - wealth creation, quality of life and financial
convenience - of our business will be increasingly challenging. Horizon Bancorp,
however, is well positioned to meet these challenges having embarked on a
focused set of strategies to create a "new" diversified financial services
company through IMS Investment Management, The Loan Store, Inc., HBC Insurance
Group, Inc. and Horizon Bank.
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MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
ANALYSIS OF FINANCIAL CONDITION
Investment Securities
- ---------------------
Horizon maintains an overall investment portfolio of high quality with very low
credit risk. Investment securities totaled $71.851 million at December 31, 1996
and consisted of U.S. Treasury and Government Agency securities of $7.861
million (11%); Municipal securities of $10.017 million (14%); Other securities
of $4.146 million (6%); and Mortgage Backed securities of $49.827 million (69%).
Total investment securities decreased 17.5% from 1995. The decrease was from
principal and interest payments received on mortgage backed securities and from
the maturity of investments, primarily U.S. Treasury and Government Agency
securities. These funds were used primarily to fund loan growth during 1996.
As indicated above, the majority of the investment portfolio consists of
mortgage backed securities. 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 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, 1996, the mortgage backed securities in the investment portfolio had an
average life of 6.63 years. Mortgage backed 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. That risk is mitigated by a
shorter average life. Management currently believes that this risk is nominal.
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Mortgage backed securities are repriced when the underlying mortgages carry
adjustable interest rates, some of which may have caps. Approximately 39% of the
mortgage backed securities that Horizon holds are secured by adjustable rate
mortgages. Adjustments to the interest rates on the underlying mortgages occur
throughout the year and these rate adjustments are passed through to the
mortgage backed security immediately. The average amount and yield of the
securities subject to repricing during each of the quarters of 1997, are as
follows:
(IN THOUSANDS)
Amount Yield
------ -----
First Quarter, 1997 $ 969 7.36%
Second Quarter, 1997 3,995 7.19%
Third Quarter, 1997 10,711 7.66%
Fourth Quarter, 1997 2,166 8.00%
The portion of the investment portfolio that is represented by the securities of
State and Political Subdivisions is generally rated by Standard and Poor's
and/or Moody's Investors Service. At December 31, 1996, this portion of the
investment portfolio had an original cost of $10.017 million and of that amount,
$8.218 million (82%) were rated AAA; $666 thousand (7%) were rated AA or A; and
$1.113 million (11%) were not rated. Most of the not rated bonds were issued by
local municipalities in our market area.
Management adopted Statement of Financial Accounting Standards (FAS) No. 115
"Accounting for Certain Investments in Debt and Equity Securities" on January 1,
1994. FAS 115 requires that debt securities that Horizon has both the positive
intent and ability to hold to maturity be carried at amortized cost. Debt
securities that Horizon does not have the positive intent and ability to hold to
maturity and all marketable equity securities are classified as available for
sale or trading and are carried at fair value.
Unrealized gains and losses on securities classified as available for sale are
carried as a separate component of stockholders' equity. Horizon considers a
significant portion of its investment portfolio available for sale under
guidelines set forth in FAS 115. As a result, Horizon transferred a major
portion of its investment portfolio to available for sale upon adoption of FAS
115.
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At December 31, 1996, 82.2% of investment securities were classified as
available for sale compared to 86.0% at December 31, 1995. 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 $145 thousand, which resulted in a $85
thousand addition, net of tax, to stockholders' equity at December 31, 1996.
This compared to a $466 thousand, net of tax, addition to stockholders' equity
at December 31, 1995.
Currently, Horizon does not maintain a trading account and is not using any
derivative products for hedging or other purposes.
Loans
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Total loans were $271.476 million at December 31, 1996, the principal earning
asset of Bank . The current level of loans is an increase of 12.34% from the
December 31, 1995 level of $241.662 million. As the table below indicates, the
increases are primarily in 1-4 family real estate loans which increased $14.822
million or 12.75%, working capital and equipment loans which increased $7.822
million or 15.18% and consumer real estate/home improvement loans which
increased $6.227 million or 45.45%. These increases were offset by the sale of
consumer education loans in July, 1996 which reduced education loans by $9.765
million or 99.10%.
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(In thousands) $ %
December 31 1996 1995 Change Change
- ----------- ---- ---- ------ ------
Real estate loans:
1-4 Family $131,071 $116,249 14,822 12.75%
Multifamily 466 729 (263) -36.08%
Other 2,202 2,761 (559) -20.25%
-------- -------- ------ -----
Total 133,739 119,739 14,000 11.69%
Commercial Loans:
Working Capital and Equipment 59,359 51,537 7,822 15.18%
Real Estate, including Agriculture 5,698 7,006 (1,308) -18.67%
Tax Exempt 6,926 5,895 1,031 17.49%
Other 3,477 1,687 1,790 106.11%
-------- -------- ------ -----
Total 75,460 66,125 9,335 14.12%
Consumer Loans:
Auto 20,353 16,799 3,554 21.16%
Recreation 1,434 1,095 339 30.96%
Real Estate/ Home Improvement 19,929 13,702 6,227 45.45%
Education 89 9,854 (9,765) -99.10%
Home Equity 4,041 3,211 830 25.85%
Credit Cards 7,244 6,018 1,226 20.37%
Unsecured 5,154 1,605 3,549 221.12%
Other 4,033 3,514 519 14.77%
-------- -------- ------ -----
Total 62,277 55,798 6,479 11.61%
Grand Total $271,476 $241,662 29,814 12.34%
======== ======== ====== ======
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The acceptance and management of credit risk is an integral part of Bank's
business as a financial intermediary. Bank has established rigorous underwriting
standards including a policy that monitors the lending function through strict
administrative and reporting requirements. Bank maintains an independent loan
review function that regularly attests to asset quality.
Community Reinvestment
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Bank actively promotes home ownership among minority and low-to-moderate income
groups under our Community Reinvestment Act programs. These programs include
special marketing efforts, education programs for prospective home owners and
financial assistance and special loan programs through the Bank's membership in
the Federal Home Loan Bank. Bank is a partner with organizations assisting
minority and low-to -moderate income families, including the Community
Development Corporation which provides direct construction programs and other
forms of housing assistance.
The primary obstacle to home ownership for low-to-moderate income families in
our market has been a poor credit history on the part of the applicant. Special
credit counseling programs are now available for these potential borrowers and
some success has been seen from these efforts, although results do not reflect
large numbers of qualified applicants. Another obstacle today is that the price
of a home results in a mortgage payment that is unaffordable by many prospective
families.
Real Estate Loans
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Real estate loans totaled $133.739 million or 49% of total loans as of December
31, 1996, compared to $119.739 million or 50% as of December 31, 1995. This
category consists of home mortgages which generally require a loan to value of
at least 80%. Some special guaranteed or insured real estate loan programs do
permit a higher loan to collateral value ratio. Legally binding commitments to
extend credit on real estate loans totaled $2.657 million and $2.996 million at
December 31, 1996 and 1995, respectively.
In addition to the customary real estate loans described above, Bank also had
outstanding on December 31, 1996, $4.041 million in home equity lines of credit
and $3.211 million at December 31, 1995. Credit lines normally limit the loan to
collateral value to no more than 70%. These loans are classified as consumer
loans in the table above and in Note 4 to the consolidated financial statements.
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Residential real estate lending is a highly competitive business. As of December
31, 1996, the real estate loan portfolio reflected a wide range of interest rate
and repayment patterns, but could generally be categorized as follows:
(Dollars in thousands)
|-----------------1996-------------| |-------------1995---------------|
Percent of Percent of
---------- ----------
Amount Portfolio Yield Amount Portfolio Yield
------ --------- ----- ------ --------- -----
Fixed Rate
Monthly Payment $53,508 40.01% 7.90% $ 55,602 46.44% 7.92%
Bi-Weekly Payment 25,782 19.28% 7.84% 25,951 21.67% 7.85%
Adjustable Rate
Monthly Payment 53,807 40.23% 7.49% 37,439 31.27% 7.62%
Bi-Weekly Payment 642 0.48% 8.18% 747 0.62% 8.76%
--- ----- ----- --- ----- -----
Total $133,739 100.00% 7.74% $119,739 100.00% 7.83%
======== ======= ===== ======== ======= =====
In addition to the real estate loan portfolio, Bank sells real estate loans
which it services. On December 31, 1996, the portfolio serviced consisted of 359
loans totaling $19.609 million. The sale of real estate loans was greatly
diminished during 1995, but sales resumed in 1996. Total loans sold during 1996
totaled $6.392 million.
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Commercial Loans
- ----------------
Commercial loans totaled $75.460 million or 28% of total loans as of December
31, 1996, compared to $66.125 million or 27% as of December 31, 1995.
Commercial loans consisted of the following types of loans at December 31:
(In thousands)
|----------------------1996---------------------| |-------------------1995------------------|
Percent of Percent of
Mumber Amount Portfolio Number Amount Portfolio
------ ------ --------- ------ ------ ---------
SBA Guaranteed Loans 43 $4,748 6.29% 44 $4,961 7.50%
Municipal Government 63 8,884 11.77% 28 8,144 12.32%
Lines of Credit 149 16,192 21.46% 135 16,868 25.51%
Real Estate and Equipment Term Loans 296 45,636 60.48% 312 36,152 54.67%
--- ------ ------ --- ------ ------
Total 551 $75,460 100.00% 519 $66,125 100.00%
=== ======= ======= === ======= =======
First Citizens Bank was recognized by the State of Indiana as the top lender in
the state sponsored Capital Access Program for the third year and is a Certified
Lender with the Small Business Administration.
Consumer Loans
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Consumer loans totaled $62.277 million or 23% of total loans as of December 31,
1996, compared to $55.798 million or 23% as of December 31, 1995. The total
consumer loan portfolio increased 9.6% in 1995 despite the planned reduction in
the indirect loan portfolio of 8.0%. In 1996, the consumer loan portfolio
continued to grow, increasing 11.61% even after the sale of education loans
totaling $9.765 million or 17.66% of the consumer portfolio. These increases can
be attributable to Bank's strong emphasis on direct lending in the sales
offices.
In mid 1995, Bank purchased a credit scoring system to assist in lending
decisions. A credit scoring system is a computer-based predictive behavior
program that uses information such as employment history, credit reports and
monthly income and expenses to make a recommendation regarding the approval of a
consumer loan. This system has assisted in improving the approval ratio on
consumer installment loans.
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Allowance and Provision for Loan Losses
- ---------------------------------------
The allowance for loan losses represents Bank's estimate of potential credit
losses associated with the loan portfolio, including off-balance-sheet lending
commitments. 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. Bank 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, Bank reviews various
factors affecting the quality of the loan portfolio. 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. Bank 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 Banking Circular 201 which gives guidance in determining the adequacy
of the allowance for loan losses.
At December 31, 1996, the allowance for loan losses was .90% of total loans
outstanding, compared to 1.15% at December 31, 1995.
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 status. Nonperforming loans for the previous three years ending
December 31 are as follows:
(In thousands)
1996 1995 1994
---- ---- ----
Nonperforming Loans $ 998 $ 1,201 $ 3,268
===== ======= =======
Nonperforming loans were .41 times the allowance for loan losses at December 31,
1996 compared to .43 and 1.28 times the allowance for loan losses on December
1995 and 1994, respectively. The decrease in the nonperforming loans as of
December 31, 1995 is primarily due to three loans which were returned to a
performing status. These loans had sustained required payment performance over a
period of six months or longer.
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Bank adopted FAS No. 114 and 118, "Accounting by Creditors for Impairment of a
Loan" as of January 1, 1995. This statement addresses how a financial
institution classifies impaired loans. 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.
FAS No. 114 and 118 apply to all loans except large groups of homogeneous loans
that are collectively evaluated. Smaller-balance, homogeneous loans are
evaluated for impairment in total. Such loans include residential first mortgage
loans secured by 1 to 4 family residences, residential construction loans,
automobile, home equity and second mortgage loans. Commercial loans and real
estate 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) and the related allowance for OREO losses for the
previous three years ending December 31 is as follows:
(In thousands)
1996 1995 1994
---- ---- ----
Other real estate owned $500 $4,193 $5,730
Allowance for OREO losses 151 1,075 1,801
---- ------ ------
Net other real estate owned $349 $3,118 $3,929
==== ====== ======
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The decline in OREO during 1996 is a result of the sale of one property owned by
Bank's wholly owned subsidiary, Trail Creek Properties, Inc. ("TCP"). On August
14, 1996, TCP announced it had signed an agreement with Indiana Blue Chip Hotel
& Riverboat Casino Resort Corp. ("Blue Chip") for the sale of property commonly
known as Newport Marina and some surrounding contiguous and noncontiguous
parcels. This property is to be used for a riverboat gaming site. The Newport
Marina property was acquired by TCP in 1990 in a foreclosure action on a
defaulted loan. The sale, consummated on November 4, 1996, resulted in a gain of
approximately $1 million, net of tax.
DEPOSITS
- --------
The primary source of funds for Bank comes from the acceptance of demand and
time deposits. However, at times 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 $289.180
million at December 31, 1996 compared to $288.984 million at December 31, 1995
or an increase of .07% . Below is a table of average deposits and rates by
category for the previous three years ending December 31.
(In Thousands)
Average Balance Average Rate
Outstanding for the Paid for the
Year Ended December 31 Year Ended December 31
---------------------- ----------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Noninterest-bearing
demand deposits $ 33,680 $ 34,186 $ 34,193
Interest-bearing
demand deposits 53,851 51,802 52,529 1.48% 1.47% 1.49%
Savings deposits 70,386 76,127 90,482 2.25 2.25 2.49
Time deposits 132,780 125,690 113,288 5.44 5.42 3.94
--------- --------- ---------
Total deposits $ 290,697 $ 287,805 $ 290,492
========= ========= =========
Management believes that the slow growth in deposits is the result of the lower
interest rate environment, intense competition from non-financial institutions
offering mutual funds, annuities and other investment alternatives and from
Bank's own or competitive borrowed funds such as FHLB borrowings. Plans for 1997
include growth in deposits, especially time deposits, and will likely cause an
increase in the average rate paid.
22
23
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - RETIREMENT PLAN
- ------------------------------------------------------
In early 1993, the Compensation Committee of the Board initially discussed the
continuation of Horizon's employee retirement benefit program which is
maintained as an Employee Stock Ownership Plan. In August 1993, the Board of
Directors approved the continuation of this plan and authorized the transfer of
172,414 shares of Horizon's stock into the ESOP for future allocation to
employee retirement accounts. This was reported to shareholders in the 1993
annual report issued in April, 1994. Upon approval by all the required
regulatory agencies, Horizon issued $5,000,006 in stock on August 26, 1994 at a
price of $29 per share, the market value of the stock at the time the
transaction was approved. Under Federal regulation, the ESOP may pay a value
equal to or less than market value for acquired shares, but not more. Under
Statement of Position 93-6 "Employers Accounting for Employee Stock Ownership
Plans" issued by the Accounting Standards Division of the American Institute of
Certified Public Accountants, these shares are not included in outstanding
shares for the purposes of computing earnings per share and book value per share
until they are committed to be released for allocation to employee retirement
accounts.
On July 3, 1996, after obtaining approval from all required regulatory agencies,
the ESOP borrowed $965,500 directly from Horizon and utilized the proceeds to
purchase 23,550 shares from unrelated shareholders. In exchange, the ESOP issued
a Term Note and Security Agreement to Horizon.
As of December 31, 1996, 135,930 shares were allocated to employees combined
with 179,427 unallocated shares for a total of 315,357 shares in the ESOP.
Dividends paid on 135,930 shares which have been allocated to employee accounts
in prior years are returned to Horizon in payment for shares not yet allocated
and as a result these dividends are returned to capital and are not recorded as
compensation expense. Dividends paid on unallocated shares as well as any
additional contributions made by Horizon to the ESOP are treated as compensation
expense, but are returned to capital as a payment for unallocated shares.
Although the stock being acquired carries an issue price of $29 per share, the
stock must be allocated at its current market value if that is higher at the
date of allocation. In this instance the cost increase is charged to
compensation expense and is also returned to capital. As a result, the cost of
providing a retirement benefit, as well as the reduction in cash for dividends
on allocated shares, are returned to Horizon's capital accounts. Retirement
programs in other companies that are not ESOP companies result in costs only and
no return of capital is realized. Therefore, although the ESOP results in
charges to expense like any retirement plan, from a capital retention
standpoint, the ESOP is of no cost to Horizon. Further, Horizon receives special
tax benefits for ESOP related dividends that are not otherwise available.
Because the costs attributable to the ESOP are returned to capital under
Horizon's policy, the amount of such ESOP related additions may be added to net
income in computing net income for dividend purposes.
23
24
As of December 31, 1996, the ESOP owned 34.91% of the outstanding shares of
Horizon and is subject to regulation and review by the Federal Reserve Bank as a
bank holding company. Also, shares owned in the ESOP are subject to the voting
decisions of the individual employees and are not otherwise voted by management.
Through their Visions and Values document, the employees have indicated that it
is their intent to maintain their ownership in Horizon as an independent
community bank. They are committed to doing those things necessary to make it a
strong financial institution which brings high value to its stakeholders - its
customers, shareholders, employees and communities. In addition to those shares
owned by the ESOP, insiders also own other shares which would bring the
ownership of insiders to a level of 38.54%, excluding vested stock options, as
of December 31, 1996.
At December 31, 1996, the ESOP paid $512,700 to Horizon in order to release
17,607 shares which were allocated to participants.
CAPITAL RESOURCES
- -----------------
The capital resources of Horizon and Bank remain strong and exceed regulatory
capital ratios for "well capitalized" banks at December 31, 1996. Stockholders'
equity totaled $33.508 million ($4.211 million from ESOP) as of December 31,
1996 compared to $32.371 million ($3.818 million from ESOP) as of December 31,
1995. The increase in stockholders' equity during 1996 is the result of net
income, net of dividends paid offset by the decrease in the market value of
investment securities available for sale accounted for as an addition/reduction
of stockholders' equity. At year end 1996, the ratio of stockholders' equity to
assets was 8.77% compared to 8.80% for 1995.
Horizon has selectively purchased shares that became available in the market
from time to time. During 1996, management purchased 8,778 shares at a cost of
$368 thousand compared to 21,562 shares at a cost of $745 thousand and 7,041
shares at a cost of $233 thousand for 1995 and 1994, respectively.
Horizon paid dividends in the amount of $1.40 per share in 1996 and $1.20 per
share in 1995 and 1994. The dividend pay-out ratio (dividends as a percent of
net income) was 27% during 1996 as compared to 29% and 34% in 1995 and 1994,
respectively. The dividend pay-out ratio is lower in 1996 and 1995 because net
income includes the gain on sale of OREO of approximately $1 million, net of
tax, in 1996 and the Federal and State tax refunds of $1.252 million, including
interest, in 1995. The dividend pay-out ratio excluding the OREO gain and tax
refunds would be 37% and 50% in 1996 and 1995, respectively. Horizon intends to
target a dividend pay-out ratio of 35-45% in the future as determined by
quarterly earnings, capital levels and regulatory approvals. Because all of the
costs attributable to the ESOP are returned to capital, the amount of such ESOP
related additions may be added back to net income in computing dividends under
Horizon's policy. For additional information regarding dividend conditions, see
Note 1 of the Notes to the Consolidated Financial Statements.
24
25
As of December 31, 1996, 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.
IMS INVESTMENT MANAGEMENT
- -------------------------
On October 1, 1996, the Bank formed a wholly-owned subsidiary, IMS Investment
Management, N.A. (IMS). IMS manages the majority of the trust accounts
previously managed by Bank. Assets under management of IMS had a book value of
$351 million at December 31, 1996 compared to $319 million at December 31, 1995.
This represents a 10.0% increase over 1995.
The book value and market value of assets held in IMS at December 31, 1996 by
asset type are as follows: (In thousands)
Book Value Percentage Market Value Percentage
Cash $1,388 0.40% $1,388 0.34%
Money Market Funds 56,692 16.14% 56,692 13.98%
Government and Agency Bonds 88,772 25.28% 89,305 22.02%
Municipal Bonds 49,137 13.99% 50,369 12.42%
Corporate Bonds 38,237 10.89% 38,629 9.53%
Common and Preferred Stock 86,970 24.76% 137,681 33.96%
Mutual Funds 24,916 7.09% 26,721 6.59%
Miscellaneous 5,095 1.45% 4,723 1.16%
-------- ------ -------- ------
Total $351,207 100.00% $405,508 100.00%
======== ======= ======== =======
25
26
IMS manages a variety of types of investment accounts including personal trusts,
agencies, estates and guardianships, corporate agencies and employee benefit
agencies and trusts. The total book values of each of these types of accounts at
December 31, 1996 are as follows:
(In thousands)
Book Value Percentage
---------- ----------
Agencies $147,901 42.11%
Estates and Guardianships 3,309 0.94%
Personal Trusts 100,246 28.55%
Employee Benefit 99,206 28.25%
Corporate Agency 437 0.12%
Other 108 0.03%
-------- ------
Total $351,207 100.00%
======== =======
Agencies total 42.11% of the book value of the accounts administered by IMS at
December 31, 1996. In an agency account, IMS typically holds assets for a client
and maintains records of these assets. IMS may or may not have the
responsibility for making investment decisions on this type of account. Personal
trusts consist of 28.55% of the assets managed by IMS. In a personal trust, IMS
is named trustee for the assets in the trust. There may be an estate plan
included in this type of trust and the investment decisions may be made by
either IMS or the grantor of the personal trust. Employee benefit agencies and
trusts are 28.25% of the assets in IMS. Responsibilities of IMS for employee
benefit accounts normally consist of maintaining records for each plan
participant, complying with regulations governing retirement plans and may
include making investment decisions.
26
27
RESULTS OF OPERATIONS
NET INCOME
- ----------
Consolidated net income was $3.824 million or $5.19 per share for 1996 compared
to $3.039 million or $4.05 per share and $2.668 million or $3.48 per share in
1995 and 1994, respectively. Because of the unique qualities of ESOP derived
costs discussed above, these earnings from a capital retention standpoint could
be comparable to a non-ESOP performance of $4.409 million or $5.98 per share for
1996, compared to $3.631 million or $4.84 per share and $2.828 million or $3.68
per share in 1995 and 1994 respectively. In November, 1996, a gain on sale of
OREO was recorded totaling approximately $1 million or $1.35 per share, net of
tax. In March 1995, Horizon received a Federal income tax refund of $954
thousand plus interest of $298 thousand. The total $1.252 million or $1.67 per
share is included in 1995 net income.
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 it has
invested and the interest paid on deposits and other funding sources. The net
interest margin is net interest income expressed as a percentage of average
earning assets. Horizon's earning assets consist of loans, investment securities
and interest bearing balances in banks.
27
28
--------------1996------------ -------------1995-----------------
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Interest-earning assets
Loans - total (1) (3) $256,580 $23,096 9.00% $226,198 $20,228 8.94%
Taxable investment securities 67,833 4,504 6.64% 82,348 5,422 6.58%
Nontaxable investment securities (2) 10,138 455 4.49% 12,233 519 4.24%
Interest-bearing balances and 968 46 4.75% 1,044 60 5.75%
money market investments (4)
Bankers Acceptances
Federal funds sold 2,476 132 5.33% 592 33 5.57%
----- --- ----- --- -- -----
Total interest-earning assets 337,995 28,233 8.35% 322,415 26,262 8.15%
------- ------ ----- ------- ------ -----
Noninterest-earning assets
Cash and due from banks 12,879 13,310
Allowance for loan losses (2,655) (2,716)
Other assets 19,547 20,303
------ ------
Total assets $367,766 $353,312
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings deposits 70,386 1,587 2.25% 76,127 1,712 2.25%
Interest-bearing demand deposits 53,851 798 1.48% 51,802 760 1.47%
Time deposits 132,780 7,221 5.44% 125,690 6,811 5.42%
Short-term borrowings 13,529 713 5.27% 15,948 939 5.89%
Long-term debt 27,306 1,481 5.42% 16,726 890 5.32%
------ ----- ----- ------ --- -----
Total interest-earning liabilities 297,852 11,800 3.96% 286,293 11,112 3.88%
------- ------ ----- ------- ------ -----
Noninterest-bearing liabilities
Demand deposits 33,680 34,186
Other liabilities 3,479 2,719
Stockholder's equity 32,755 30,114
-------- --------
Total liabilities and stockholders' equity $367,766 $353,312
======== ========
Net interest income 16,433 15,150
======== ========
Net interest income as a percent of interest-earning assets 4.86% 4.70%
==== ====
---------------1994------------------
Average Yield/
(In thousands) Balance Interest Rate
------- -------- ----
ASSETS
Interest-earning assets
Loans - total (1) (3) $218,053 $18,559 8.51%
Taxable investment securities 86,337 4,906 5.68%
Nontaxable investment securities (2) 15,483 620 4.00%
Interest-bearing balances and 1,253 51 4.07%
money market investments (4)
Bankers Acceptances 538 18 3.35%
Federal funds sold 1,306 43 3.29%
------- ------ -----
Total interest-earning assets 322,970 24,197 7.49%
------- ------ -----
Noninterest-earning assets
Cash and due from banks 16,279
Allowance for loan losses (2,540)
Other assets 17,425
------
Total assets $354,134
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings deposits $90,482 2,253 2.49%
Interest-bearing demand deposits 52,529 781 1.49%
Time deposits 113,288 4,466 3.94%
Short-term borrowings 14,393 659 4.58%
Long-term debt 20,429 1,198 5.86%
-------- ------ -----
Total interest-earning liabilities 291,121 9,357 3.21%
-------- ------ -----
Noninterest-bearing liabilities
Demand deposits 34,193
Other liabilities 449
Stockholder's equity 28,371
--------
Total liabilities and stockholders' equity $354,134
========
Net interest income 14,840
======
Net interest income as a percent of interest-earning assets 4.59%
=====
<FN>
(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 loan fees.
(2) Yields are not presented on a tax-equivalent basis.
(3) Loan fees and late fees included in interest on loans aggregated
$1,122,390, $1,056,404 and $956,959 in 1996, 1995 and 1994,
respectively.
(4) Horizon has no foreign office and, accordingly, no assets or
liabilities attributable to foreign operations. Horizon's subsidiary
bank had no funds invested in Eurodollar Certificates of Deposit at
December 31, 1996.
28
29
1996-1995 1995 - 1994
Increase/(Decrease) Increase/(Decrease)
(In thousands) Change Change Change Change
Total Due To Due To Total Due To Due To
INTEREST INCOME Change Volume Rate Change Volume Rate
--------------- ------ ------ ---- ------ ------ ----
Loans - total $2,868 $2,734 $134 $1,669 $708 $ 961
Taxable investment securities (918) (963) 45 516 (235) 751
Nontaxable investment securities (64) (93) 29 (101) (136) 35
Interest bearing balances & (14) (4) (10) 9 (10) 19
money market investments
Bankers Acceptances (18) (9) (9)
Federal Funds Sold 99 101 (2) (10) (31) 21
------ ------ ---- ------ ------ ------
Total interest income $1,971 $1,775 $196 $2,065 $ 287 $1,778
------ ------ ---- ------ ------ ------
INTEREST EXPENSE
----------------
Savings deposits $ (125) $ (129) $ 4 $ (541) $ (336) $ (205)
Interest bearing demand deposits 38 30 8 (21) (11) (10)
Time deposits 410 385 25 2,345 530 1,815
Short-term borrowings (226) (134) (92) 280 77 203
Long-term debt 591 574 17 (308) (204) (104)
------ ------ ---- ------ ------ ------
Total interest expense 688 726 (38) 1,755 56 1,699
------ ------ ---- ------ ------ ------
NET INTEREST EARNINGS $1,283 $1,049 $234 $ 310 $ 231 $ 79
====== ====== ==== ====== ====== ======
29
30
Horizon's average earning assets were $337.995 million in 1996 compared to
$322.415 million in 1995 and $322.970 million in 1994. The net interest margin
for 1996 was 4.86% compared to 4.70% and 4.59% in 1995 and 1994, respectively.
The increase in net interest margin from 1995 to 1996 was primarily related to
the increased volume of loans, especially consumer loans, offset slightly by
increased volume of certificates of deposits and long term debt.
The increase in net interest margin from 1994 to 1995 was primarily due to
interest rate increases during late 1994 and early 1995 that allowed Horizon to
obtain higher interest rates on adjustable rate loans and investment securities
offset by the increased rates that were paid on deposits and other funding,
especially certificates of deposits and short term borrowings.
NONINTEREST INCOME
- ------------------
The major components of noninterest income consist of service charges on deposit
accounts 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 Bank's markets. Service
charges on deposits were $1.573 million, $1.441 million and $1.310 million for
1996, 1995 and 1994, respectively.
Net security gains were $0 for 1996 compared to $46 thousand and $273 thousand
for 1995 and 1994, respectively. Net security gains in 1995 and 1994 were the
result of investment portfolio repositioning that occurred during these years.
Trust fees were $2.094 million in 1996 compared to $1.769 million and $1.700
million in 1995 and 1994, respectively.
NONINTEREST EXPENSE
- -------------------
Noninterest expense totaled $16.694 million in 1996 compared to $15.931 million
and $14.609 million in 1995 and 1994, respectively. The increases in 1996 was a
result of increased salaries and benefits and data processing and equipment
expense offset by a decrease in loss on other real estate owned. The increase in
1995 was a result of increased salaries and benefits, data processing and
equipment expense and training costs offset by a decrease in loss on other real
estate owned.
30
31
Salaries and benefits increased 3.67% during 1996 compared to an increase of
13.72% for 1995 and an increase of 1.98% for 1994. The 1995 increase is
primarily the result of an increase in group health insurance costs, termination
benefits, ESOP expense and stock appreciation rights expense offset by the
decrease in bonus expense. The Bank developed and implemented a staffing model
to monitor productivity and determine the optimum number of employees per
division and reached these levels in early 1996.
Data processing and equipment expense increased 22.56% in 1996, 4.4% in 1995,
27.55% in 1994. The 1996 increase is due to investments in technology that
caused an increase in depreciation expense and an increase in support and
maintenance expense. The 1994 increase is due to expenses associated with
conversion to an in-house main frame computer system and other technology
related expenses.
Total other expenses increased 4.89%, 9.44% and 11.11% in 1996, 1995 and 1994,
respectively. The primary factors contributing to the 1996 increase in other
expense were: 1) $70 thousand increase in supplies and printing expenses, 2) $75
thousand increase in advertising expenses, 3) $199 thousand increase in
corporate expenses, 4) $170 thousand increase in losses, including frauds and
forgeries and 5) $332 thousand decrease in deposit insurance expense . The
primary factors contributing to the 1995 increase in other expense were: 1) $185
thousand increase in external training expenses associated with an intense
development program for bank owner-employees, 2) a $68 thousand increase in
advertising expenses, 3) a decrease of $333 thousand from the reduction in
Federal Deposit Insurance Corporation (FDIC) rates, 4) $176 thousand expense
related to the Insurance Company and 5) a $68 thousand increase in communication
expenses.
FDIC deposit insurance assessments decreased 97.65% in 1996 compared to
decreases of 49.48% and 8.19% in 1995 and 1994, respectively. The FDIC assesses
"risk-based" deposit insurance premiums based upon capital levels and regulatory
supervisory ratings. As a "well capitalized" financial institution, Bank
qualified for the lowest possible assessment. The Bank Insurance Fund (BIF) was
fully funded in 1996 and the Bank's assessment rate was reduced to zero. The
1995 decrease was due to a refund of $171 thousand and the reduction of rates to
$.04 per $100 of insured deposits. On September 30, 1996, the Deposit Insurance
Funds Act of 1996 was signed into law, which made members of the BIF partially
responsible for servicing the interest on Financing Corporation (FICO) bonds
that were issued by the government to pay for the thrift cleanup in the late
1980's. Beginning January, 1997, Horizon will begin paying the FICO assessment
of 1.296 cents per $100 of deposits.
31
32
INCOME TAXES
- ------------
The income tax provision totaled $1.599 million in 1996 compared to $167
thousand and $1.449 million 1995 and 1994, respectively. The effective tax rate
was 29.49%, 5.21% and 35.20% for 1996, 1995, and 1994, respectively. Horizon
received a Federal income tax refund during the first quarter of 1995 totaling
$1.252 million including interest of $298 thousand. In 1993, Horizon filed
several amended tax returns to obtain refunds of Federal taxes paid in prior
periods dating back to 1985. Excluding the portion of the tax refund that was a
direct reduction of tax expense in 1995, the effective tax rate would have been
34.97%.
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 1996,
cash flows were generated from earnings of $3.8 million, a $14.3 million
decrease in investment securities, a $6.4 million sale of loans and a $20
million increase in borrowings with FHLB. Cash flows were used for a $37.8
million increase in loan demand, a $4 million purchase of premises and equipment
and $8.7 million reduction in short term borrowings. The net cash position
decreased $1.7 million, primarily in cash and due from banks and Federal funds
sold.
32
33
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 to quantify 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 of 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, 1996, Horizon had a negative Gap position of 1:.82 This indicates
that the total amount of assets repricing within one year were 82% of the total
amount of liabilities repricing within the same time period. This compares to a
negative GAP position of 1:.95 at December 31, 1995.
33
34
Rate Sensitivity
Greater than 3 months Less than 6 months
3 months and and Greater
(In thousands) or less Less than 6 months Greater than 1 year than 1 year Total
-------------- ------- ------------------ ------------------- ----------- -----
Loans $53,313 $17,009 $33,533 $166,220 $270,075
Money Market Investments 789 789
Interest bearing balances with Banks 211 211
Investment securities and investment securities 8,063 10,778 17,167 35,847 71,855
available for sale
Other assets 39,108 39,108
-----------------------------------------------------------------------------
Total assets $62,165 $27,787 $50,700 $241,386 $382,038
=============================================================================
Non-interest bearing deposits 46,050 46,050
Interest bearing deposits 71,639 35,176 20,517 115,798 243,130
Borrowed funds 20,324 23,000 11,025 54,349
Other liabilities 5,001 5,001
Stockholders equity 33,508 33,508
-----------------------------------------------------------------------------
Total liabilities and stockholders equity $91,963 $35,176 $43,517 $211,382 $382,038
=============================================================================
GAP $(29,798) $(7,389) $7,183 $30,004
Cumulative GAP (29,798) (37,187) (30,004) 0
34
35
CONSOLIDATED BALANCE SHEETS (THOUSANDS)
1996 1995
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks $ 19,551 $ 20,987
Money market investment 789 1,079
--------- ---------
Total cash and cash equivalents 20,340 22,066
Short-term investments-interest-bearing
balances in banks 211 206
Investment securities available for sale 59,041 74,942
Investment securities held to maturity
(fair value $12,838 - 1996, $12,202 - 1995) 12,810 12,167
Loans held for sale 1,034
Loans 271,476 241,662
Allowance for loan losses (2,435) (2,777)
--------- ---------
Net loans 269,041 238,885
Premises and equipment 14,053 11,027
Accrued interest receivable 2,216 2,900
Other assets 3,292 5,820
--------- ---------
Total assets $ 382,038 $ 368,013
========= =========
1996 1995
---- ----
LIABILITIES
Deposits
Noninterest-bearing $ 46,050 $ 45,479
Interest-bearing 243,130 243,505
--------- ---------
Total deposits 289,180 288,984
Short-term borrowings 12,849 21,569
Federal Home Loan Bank advances 41,500 21,400
Accrued interest payable 590 567
Other liabilities 4,411 3,122
--------- ---------
Total liabilities 348,530 335,642
========= =========
Equity received from contributions and dividends
to the ESOP 4,211 3,818
STOCKHOLDERS' EQUITY
Common stock: $1 stated value, 5,000,000 shares
authorized and 1,027,531 shares issued, less
ESOP shares of 315,357 and 295,370 at
December 31, 1996 and 1995 708 732
Additional paid-in capital 7,962 9,238
Retained earnings 23,898 21,105
Net unrealized gain/loss on securities 85 466
Less treasury stock, at cost
(124,085 shares - 1996, 115,307 shares - 1995) (3,356) (2,988)
--------- ---------
Total stockholders' equity 29,297 28,553
--------- ---------
Total liabilities and stockholder's equity $ 382,038 $ 368,013
========= =========
The accomanying notes are an integral part of these financial statements.
35
36
CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS)
1996 1995 1994
---- ---- ----
INTEREST INCOME
Interest and fees on loans $23,096 $20,228 $18,559
Interest and dividends on investments
Taxable 4,682 5,515 5,000
Nontaxable 455 519 620
------- ------- -------
Total interest income 28,233 26,262 24,179
------- ------- -------
INTEREST EXPENSE
Interest on deposits 9,605 9,284 7,499
Interest on Federal funds purchased
and securities sold under agreements
to repurchase 714 938 659
Interest on Federal Home Loan Bank
advances 1,481 890 1,198
------- ------- -------
Total interest expense 11,800 11,112 9,356
------- ------- -------
NET INTEREST INCOME 16,433 15,150 14,823
PROVISION FOR LOAN LOSSES 66 165
------- ------- -------
NET INTEREST INCOME AFTER
PREVISION FOR LOAN LOSSES 16,367 15,150 14,658
1996 1995 1994
---- ---- ----
NONINTEREST INCOME
Service charges on deposits 1,573 1,441 1,310
Fiduciary income 2,094 1,769 1,700
Investment security gains 46 273
Gain on sale of other real
estate owned 1,609 45 490
Other Income 474 686 295
------- ------- -------
Total noninterest income 5,750 3,987 4,068
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 8,671 8,364 7,355
Occupancy expense of Company
premises, net of rental income 1,164 1,017 1,036
Data processing and equipment
expenses 2,108 1,720 1,648
Loss on other real estate owned 55 353 479
Other expenses 4,696 4,477 4,091
------- ------- -------
Total noninterest expense 16,694 15,931 14,609
------- ------- -------
INCOME BEFORE INCOME TAXES 5,423 3,206 4,117
PROVISION FOR INCOME TAXES 1,599 167 1,449
------- ------- -------
NET INCOME $ 3,824 $ 3,039 $ 2,668
======= ======= =======
Earnings per common share $ 5.19 $ 4.12 $ 3.62
The accompanying notes are an integral part of these financial statements.
36
37
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Common Additional Retained
Stock Paid-In Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $732 $9,238 $17,212
- ---------------------------------------------------------------------------------------------------------------------
Net Income 2,668
Cash Dividends ($1.20 per share) (919)
Purchase of 7,041 shares of treasury stock
Change in unrealized loss on marketable equity securities
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $732 $9,238 $18,961
- ---------------------------------------------------------------------------------------------------------------------
Net Income 3,039
Cash Dividends ($1.20 per share) (895)
Purchase of 21,562 shares of treasury stock
Change in unrealized loss on marketable equity securities
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $732 $9,238 $21,105
- ---------------------------------------------------------------------------------------------------------------------
Net Income 3,824
Cash Dividends ($1.40 per share) (1,031)
Purchase of 8,778 shares of treasury stock
Net purchases and distributions with ESOP (24) (1,339)
Tax benefit of ESOP dividend deduction 63
Change in unrealized loss on marketable equity securities
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $708 $7,962 $23,898
- ---------------------------------------------------------------------------------------------------------------------
Unrealized Gain/loss on Total
Securities Available for Stockholders'
Sale Treasury Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $(138) $(2,010) $25,034
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 2,668
Cash Dividends ($1.20 per share) (919)
Purchase of 7,041 shares of treasury stock (233) (233)
Change in unrealized loss on marketable equity securities (2,189) (2,189)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $(2,327) $(2,243) $24,361
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 3,039
Cash Dividends ($1.20 per share) (895)
Purchase of 21,562 shares of treasury stock (745) (745)
Change in unrealized loss on marketable equity securities 2,793 2,793
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $466 $(2,988) $28,553
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 3,824
Cash Dividends ($1.40 per share) (1,031)
Purchase of 8,778 shares of treasury stock (368) (368)
Net purchases and distributions with ESOP (1,363)
Tax benefit of ESOP dividend deduction 63
Change in unrealized loss on marketable equity securities (381) (381)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $85 $(3,356) $29,297
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are in integral part of these financial statements.
37
38
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS)
1996 1995 1994
---- ---- ----
Net income $ 3,824 $ 3,039 $ 2,668
Adjustments to reconcile net income to net cash:
from operating activities:
Depreciation 1,040 892 725
Net (accretion)/amortization 312 179 247
Additional paid in capital from release of 244 172
ESOP shares
Provision for loan losses 66 165
Gains on sales of loans (8)
Security gains (46) (273)
Gain/loss on disposal of fixed assets (2) 24 21
Gain on sale of other real estate owned (1,609) (45) (490)
Loss on other real estate owned 55 353 479
Benefit of deferred taxes 357 117 (202)
Change in deferred loan fees (52) (26) (56)
Change in unearned income 51 (262) (629)
Change in interest receivable 684 (93) (167)
Change in interest payable 23 101 54
Change in other assets 2,825 697 1,423
Change in other liabilities 1,289 452 (2,415)
-------- -------- --------
Net cash provided by operating activities 9,107 5,554 1,542
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities 15,607 14,895
available for sale
Proceeds from maturities, calls and principal
repayments of investment
securities-available for sale 17,969 16,923 11,660
Proceeds from maturities, calls and principal
repayments of investment
securities-held to maturity 5,555 5,926 8,436
Purchase of investment securities-available for (2,993) (19,757) (29,584)
sale
Purchase of investment securities-held to maturity (6,217) (2,622) (5,859)
Change in short-term investments (5) (106)
Change in loans (37,452) (17,138) (6,121)
Purchase of loans (344) (1,260) (1,367)
Proceeds from sales of loans 6,392 353 3,477
Recoveries on loans previously charged-off 149 515 301
Premises and equipment expenditures (4,064) (1,667) (1,635)
-------- -------- --------
Net cash provided by (used in) investing (21,010) (3,226) (5,797)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 196 (6,800) (10,351)
Dividends paid (1,031) (895) (919)
Change in short-term borrowings (8,720) (3,124) 18,924
Purchase of treasury stock (368) (745) (233)
Change in Federal Home Loan Bank advance 20,100 3,000 (100)
-------- -------- --------
Net cash provided by (used in) 10,177 (8,564) 7,321
financing activities
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,726) (6,236) 3,066
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 22,066 28,134 25,055
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD END OF YEAR $ 20,340 $ 21,898 $ 28,121
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest $ 11,823 $ 11,011 $ 9,302
Income taxes $ 1,714 $ (202) $ 1,378
The accompanying notes are an integral part of these financial statements.
38
39
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
NATURE OF BUSINESS - The consolidated financial statements include
Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A.
(Bank), HBC Insurance Group, Inc. (Insurance Company) and The Loan Store, Inc.
(Loan Store). Bank is a full-service commercial bank offering a broad range of
commercial and retail banking and other services incident to banking. Bank's
wholly-owned subsidiary, IMS Investment Management, Inc. (IMS) offers corporate
and individual trust and agency services and investment management services.
Bank maintains five facilities located within LaPorte County, Indiana and four
facilities located in Porter County, Indiana. The Insurance Company offers
credit life and accident and health insurance. The earnings generated from the
Insurance Company is not significant to the overall operations of Horizon. The
Loan Store is engaged in the business of retail lending and operates three
facilities in Indiana. 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 intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES - Management must make estimates and assumptions in
preparing consolidated financial statements that affect the amounts reported
therein and the disclosures provided. Actual results could differ from these
estimates.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Horizon & Bank designate a
portion of their 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, comprised
primarily of Federal Home Loan Bank and Federal Reserve stock, are carried at
estimated fair value and any net unrealized gains/losses (after tax) on these
securities are reflected as a separate component of stockholders' equity.
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.
INVESTMENT SECURITIES HELD TO MATURITY- Investment securities purchased
with the intent and ability to hold to maturity, and are carried at cost and
adjusted for amortization of premiums and accretion of discounts. Gains/losses
on the disposition of securities held to maturity 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, real estate 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 collectability 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.
39
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - Bank grants commercial, real estate
mortgage and installment loans to customers located primarily in LaPorte County
and Porter County in Northwest Indiana. Commercial loans make up approximately
28% 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
businesses. Real estate mortgage loans make up approximately 49% of the loan
portfolio and are secured by both commercial and residential real estate.
Installment loans make up approximately 23% of the loan portfolio and are
primarily secured by consumer assets.
ALLOWANCE FOR LOAN LOSSES - An allowance for loan losses is established
and maintained because some loans may not be repaid in full. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates which are subject to change over time. Actual
losses may vary from current estimates and the amount of the provision may be
either greater than or less than actual net charge-offs. While a significant
portion of this reserve is intended to cover loan losses, it is considered a
general reserve for all credit-related purposes.
LOAN IMPAIRMENT - When analysis determines borrower operating results and
financial condition 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
non-accrual 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 aggregate. Such loans include residential first mortgage loans
secured by 1- 4 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.
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.
OTHER REAL ESTATE OWNED - Other real estate owned is carried at the lower
of cost or fair value, less selling costs, and is included in other assets. Any
reduction to fair value from the carrying value of the related loans at the time
of acquisition is charged to the allowance for loan losses. Subsequent
reductions in fair value, and gains or losses on sales, are recognized in
earnings in the period the reduction in value is determined or the sale is
consummated. Other real estate owned, net of allowance, included in other
assets, totaled $349,000 and $3,117,000 at December 31, 1996 and 1995,
respectively.
40
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
SERVICING RIGHTS - Prior to adopting Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," at the
beginning of 1996, servicing right assets were recorded only for purchased
rights to service mortgage loans. Subsequent to adopting this standard,
servicing rights represent both purchased rights and the allocated value of
servicing rights retained on loans sold. Servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues. At
December 31, 1996, the servicing rights asset was not material and was not
recorded under SFAS No. 122.
Excess servicing receivables are reported when a loan sale results in servicing
in excess of normal amounts, and is expensed over the estimated life of the
servicing asset.
INCOME TAXES - Horizon files annual consolidated income tax returns. SFAS
No. 109, requires an asset and liability approach for accounting for income
taxes. Its objective is to recognize the amount of taxes payable or refundable
for the current year, and deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases. The
measurement of tax assets and liabilities is based on enacted tax laws. Deferred
tax assets may be reduced, if necessary, by the amount of such benefits that are
not expected to be realized based on available evidence.
IMS 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. Income from IMS activities is
recognized on a cash basis, which is not materially different from the accrual
method.
EARNINGS PER COMMON SHARE AND DIVIDENDS DECLARED PER COMMON SHARE -
Earnings per common share have been computed based on the weighted average
number of shares outstanding during the periods presented. The number of shares
used in the computation of earnings per share is 736,887 for 1996, 750,286 for
1995, and 767,419 for 1994.
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. According to these
regulations, as of December 31, 1996 approximately $3,122,000 of additional
dividends may be paid by Bank to Horizon without prior approval of the
Comptroller of the Currency. 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 is defined to include cash and due from banks,
money market investments and Federal funds sold with maturities of 1 day or
less. Horizon reports net cash flows for customer loan transactions, deposit
transactions, short-term investments and short-term borrowings.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1995
and 1994 consolidated financial statements to be comparable to 1996.
41
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISCLOSURES ABOUT THE FAIR VALUE 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 judgment 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 the
Corporation taken as a whole. The disclosed fair value estimates are limited to
Horizon's significant financial instruments at December 31, 1996 and 1995. 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 instruments for which it is practicable to
estimate that value:
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - 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 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.
INTEREST RECEIVABLE/PAYABLE - The carrying amounts approximate fair
value.
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
the rates currently offered for deposits of similar remaining maturity.
42
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
- ------------------------------------------------------------------------------
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 LETTERS 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
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, the fair
market value is not material.
The estimated fair values of Horizon's financial instruments at December 31,
1996 and 1995 are as follows:
(Thousands)
1996 1996 1995 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Cash and cash equivalents $ 20,340 $ 20,340 $ 22,066 $ 22,066
Short-term investments 211 211 206 206
Investment securities 71,851 71,871 87,109 87,144
Net loans 270,075 258,035 238,885 240,440
Interest receivable 2,216 2,216 2,900 2,900
Financial Liabilities:
Deposits:
Noninterest-bearing $ 46,050 $ 46,050 $ 45,479 $ 45,479
Interest-bearing 243,130 246,960 243,505 244,372
---------- ------------ ---------- ----------
Total deposits 289,180 293,010 288,984 289,851
Short-term borrowings 12,849 12,824 21,569 21,569
Federal Home Loan Bank advances 41,500 41,503 21,400 21,428
Interest payable 590 590 567 567
43
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
- ----------------------------------------------------------------------------
HELD TO MATURITY
- ----------------
The amortized cost and estimated fair value of investment securities
available for sale and held to maturity are as follows:
-------------------1996--------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
AVAILABLE FOR SALE AT DECEMBER 31:
U.S. Treasury and U.S. Government
agency securities $ 4,965 $ 103 $ $ 5,068
Other securities 1,018 (4) 1,014
-------- -------- -------- --------
Subtotal 5,983 103 (4) 6,082
-------- -------- -------- --------
GNMA 7,620 148 (18) 7,750
FHLMC 16,719 154 (81) 16,792
FNMA 25,344 56 (115) 25,285
-------- -------- -------- --------
Total mortgage-backed securities 49,683 358 (214) 49,827
-------- -------- -------- --------
Total debt securities 55,666 461 (218) 55,909
Equity securities 3,230 (98) 3,132
-------- -------- -------- --------
Total investment securities available for sale $ 58,896 $ 461 $ (316) $ 59,041
======== ======== ======== ========
HELD TO MATURITY AT DECEMBER 31:
U.S. Government agency securities $ 2,793 $ $ $ 2,793
Obligations of state and political subdivisions 10,017 75 (47) 10,045
-------- -------- -------- --------
Total debt securities held to maturity $ 12,810 $ 75 $ (47) $ 12,838
======== ======== ======== ========
----------------------1995------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
AVAILABLE FOR SALE AT DECEMBER 31:
U.S. Treasury and U.S. Government
agency securities $ 7,165 $ 16 $ $ 7,181
Other securities 1,046 (8) 1,038
-------- -------- -------- --------
Subtotal 8,211 16 (8) 8,219
-------- -------- -------- --------
GNMA 9,061 154 (8) 9,207
FHLMC 21,165 395 (9) 21,551
FNMA 32,491 374 (19) 32,846
-------- -------- -------- --------
Total mortgage-backed securities 62,717 923 (36) 63,604
-------- -------- -------- --------
Total debt securities 70,928 939 (44) 71,823
Equity securities 3,235 (116) 3,119
-------- -------- -------- --------
Total investment securities available for sale $ 74,163 $ 939 $ (160) $ 74,942
======== ======== ======== ========
HELD TO MATURITY AT DECEMBER 31:
U.S. Government agency securities $ 3,164 $ 2 $ $ 3,166
Obligations of state and political subdivisions 9,003 55 (22) 9,036
-------- -------- -------- --------
Total debt securities held to maturity $ 12,167 $ 57 $ (22) $ 12,202
======== ======== ======== ========
44
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD
- --------------------------------------------------------------------------------
TO MATURITY (continued)
- -----------------------
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
(Thousands)
Amortized Fair
Cost Value
AVAILABLE FOR SALE:
Due in one year or less $ 2,019 $ 2,018
Due after one year through five years 3,964 4,064
------- -------
Subtotal 5,983 6,082
Mortgage-backed securities 49,683 49,827
------- -------
Total debt securities available for sale $55,666 $55,909
======= =======
HELD TO MATURITY:
Due in one year or less $ 2,056 $ 2,061
Due after one year through five years 3,982 3,997
Due after five years through ten years 5,122 5,158
Due after ten years 1,650 1,622
------- -------
Total debt securities held to maturity $12,810 $12,838
======= =======
Gross gains and losses realized on sales of investment securities
available for sale were $0 for 1996. Gross gains and losses realized on sales of
investment securities available for sale were $62,000 and $16,000 for 1995 and
$273,000 and $0 for 1994.
At December 31, 1996 and 1995, there were no holdings of securities of any
one issuer, other than the U.S. Government and its agencies and corporations, in
an amount greater than 10% of stockholders' equity.
Investment securities and investment securities available for sale with an
amortized cost of $19,836,000 and $45,485,000 as of December 31, 1996 and 1995,
respectively, were pledged to secure public and trust deposits, securities sold
under agreements to repurchase and Federal Home Loan Bank advances.
45
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LOANS
- --------------
Loans as presented in the consolidated balance sheets are comprised of the
following classifications:
(Thousands)
1996 1995
Commercial loans $ 75,460 $ 66,125
Real estate mortgages 133,739 119,739
Installment loans 62,277 55,798
-------- --------
Total loans $271,476 $241,662
======== ========
Loans to directors and executive officers of Horizon and Bank, including
associates of such persons, amounted to $4,188,000 and $4,689,000, as of
December 31, 1996 and 1995, respectively. During 1996 new loans or advances were
$1,551,000 and loan payments were $2,052,000.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
- ----------------------------------
The following is an analysis of the activity in the allowance for loan
losses account:
(Thousands)
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 2,777 $ 2,555 $ 2,310
Provision charged to expense 66 165
Recoveries credited to the allowance 149 515 301
Losses charged to the allowance (557) (293) (221)
------- ------- -------
Balance at end of year $ 2,435 $ 2,777 $ 2,555
======= ======= =======
At December 31, 1996 and 1995, loans past due more than 90 days and
still accruing interest approximated $682,000 and $533,000, respectively.
Loans on which the recognition of interest has been discontinued or reduced
totaled $316,000, $668,000 and $2,794,000 at December 31, 1996, 1995 and 1994,
respectively. Interest income not recognized on these loans totaled
approximately $36,000, $55,000, and $264,000 in 1996, 1995 and 1994,
respectively. There were no impaired loans as of December 31, 1996 or 1995.
46
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - ALLOWANCE FOR OTHER REAL ESTATE OWNED
- ----------------------------------------------
The following is an analysis of the activity in the allowance for other
real estate owned included in other assets:
(Thousands)
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 1,075 $ 1,801 $ 1,988
Loss on other real estate owned
charged to expense 48 59
Reversal of allowance on sale (924)
Losses charged to the allowance (774) (246)
------- ------- -------
Balance end of year $ 151 $ 1,075 $ 1,801
======= ======= =======
NOTE 7 - PREMISES AND EQUIPMENT-NET
- -----------------------------------
Premises and equipment are stated at cost, less accumulated depreciation
and consist of the following:
(Thousands)
December 31
1996 1995
---- ----
Land $ 2,504 $ 2,014
Buildings and improvements 12,757 10,328
Furniture and equipment 6,288 5,187
-------- --------
Total 21,549 17,529
Accumulated depreciation (7,496) (6,502)
-------- --------
Premises and equipment, net $ 14,053 $ 11,027
======== ========
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
totaled $1,040,000, $892,000 and $725,000, respectively.
47
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - LEASES
- ---------------
Bank has leases for premises and equipment which expire at various dates
through 2001. Many have renewal options. Bank pays taxes, insurance and
maintenance costs on the leases. Rental expense related to these leases for the
years ended December 31, 1996, 1995 and 1994 amounted to $317,000, $197,000 and
$100,000, respectively.
The future minimum commitments as of December 31, 1996, for all
noncancelable operating leases, follows:
Year Ending (Thousands)
December 31 Rental Commitments
----------- ------------------
1997 $ 287
1998 215
1999 152
2000 36
2001 27
-----
Total $ 717
=====
NOTE 9 - DEPOSITS
- -----------------
The components of the (Thousands)
deposit categories are as follows: December 31
1996 1995
----- ----
DEMAND
Noninterest-bearing $ 46,050 $ 45,479
Interest-bearing (NOW) 48,172 54,949
-------- --------
Total demand deposits 94,222 100,428
-------- --------
SAVINGS
Fixed rate 55,843 60,516
Money market (variable rate) 8,876 12,824
-------- --------
Total savings deposits 64,719 73,340
-------- --------
TIME
Certificates of deposit of $100,000 or more 28,158 17,730
Other time deposits 102,081 97,486
-------- --------
Total time deposits 130,239 115,216
-------- --------
Total deposits $289,180 $288,984
======== ========
48
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - DEPOSITS (continued)
- -----------------------------
Interest expense on time certificates of $100,000 or more was
approximately $2,001,000, $1,713,000 and $863,000 for 1996, 1995 and 1994,
respectively.
Certificates of deposit of $100,000 or more by remaining maturity:
(Thousands)
December 31
1996 1995
Due in three months or less $14,311 $11,240
Due after three months through six months 5,059 2,473
Due after six months through one year 3,261 2,219
Due after one year 5,527 1,798
------- -------
Total certificates of deposit of $100,000 or more $28,158 $17,730
======= =======
NOTE 10 - BORROWED FUNDS
Included in short-term borrowings were $11,562,000 and $9,558,000 of
securities sold under agreements to repurchase and $1,200,000 and $11,900,000 of
Federal Funds purchased, at December 31, 1996 and 1995 respectively. These
short-term borrowings mature within one year and are secured by U.S. Government
securities. In addition to these borrowings, at December 31, 1996 Bank has
available approximately $41,300,000 in credit lines with various money center
banks.
Federal Home Loan Bank Advances at December 31, 1996 by contractual maturity are
as follows:
(Thousands)
FHLB Advance, 5.16%, Due January 13, 1997 $ 7,500
FHLB Advance, 5.54%, Due December 1, 1997 3,000
FHLB Advance, 6.21%, Due August 3, 1998 5,000
FHLB Advance, 5.31%, Due October 1, 1998 3,000
FHLB Advance, 5.90%, Due December 17, 1998 3,000
FHLB Advance, 5.425%, Due October 12, 1999 10,000
FHLB Advance, 5.23%, Due January 3, 2000 10,000
-------
$41,500
=======
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and all mortgage loans.
49
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN
- ---------------------------------------------------------
Horizon maintains an employee stock ownership plan (ESOP) as a retirement
benefit program that currently covers substantially all employees. The ESOP is
noncontributory and each eligible employee is vested according to a schedule
based upon years of service.
The ESOP borrowed $3,400,000 in 1985 for the purpose of purchasing 137,259
shares of Horizon common stock at $26.85 per share from former Board members and
their families. Under terms of the loan agreement, unallocated shares held with
the Bank, as ESOP trustee, were pledged as collateral. Horizon also guaranteed
the loan, and was obligated to contribute sufficient cash to the ESOP to repay
the loan principal and interest. As additional collateral, Horizon pledged 51%
of the issued and outstanding stock of Bank. The first payment on the loan was
made in October 1985, and the last scheduled payment was paid in 1995.
In early 1993, the Compensation Committee of the Board initially discussed
the continuation of Horizon's employee retirement benefit program. In August
1993, the Board of Directors approved the continuation of this plan and
authorized the transfer of 172,414 shares of the Company's stock into the ESOP
for future allocation to employee retirement accounts. Upon approval by all the
required regulatory agencies, Horizon issued $5,000,006 in stock on August 26,
1994 at a price of $29 per share, the market value of the stock at the time the
transaction was approved. Under Federal regulation, the Employee Stock Ownership
Trust may pay a value equal to or less than market value for acquired shares,
but not more. Under Statement of Position (SOP) 93-6 "Employers Accounting for
Employees Stock Ownership Plans" issued by the Accounting Standards Division of
the American Institute of Certified Public Accountants, these shares are not
included in outstanding shares for the purposes of computing earnings per share
and book value per share until they are allocated or committed-to-be-released
for allocation to employee retirement accounts.
As of December 31, 1996 there were 315,357 shares of Horizon stock held in
the ESOP trust. Dividends received on these shares are used to service the debt
of the ESOP. Annually, when payments on ESOP debt are made, a proportionate
amount of shares are allocated to participants.
The provisions of SOP 93-6 were adopted in conjunction with the
continuation of the ESOP and affected ESOP expense beginning January 1, 1995.
Below are the transactions affecting ESOP expense and cash contributions to the
ESOP in 1996, 1995 and 1994:
(Thousands)
1996 1995 1994
---- ---- ----
Dividends paid on unallocated ESOP shares $255 $207 $ --
Market value increase of 17,607 shares released 244 172 --
Other contributions 86 213 158
---- ---- ----
Total ESOP expense included in salaries and benefits $585 $592 $158
==== ==== ====
Total cash contributions made to ESOP during the year $86 $207 $298
=== ==== ====
50
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN (continued)
- ---------------------------------------------------------------------
The balance sheet presentation of "Equity received from contributions and
dividends to the ESOP" follows the guidance of Emerging Issue Task Force Issue
No. 90-11, "Sponsor's Balance Sheet Classification of Capital Sotck with a Put
Option Held by Employee Stock Ownership Plan." This Issuance requires securities
held by an ESOP to be reported outside of permanent equity if by their terms
they can be returned to the sponsor for cash. Since Horizon stock is not readily
tradable on an established market, the ESOP stock can be returned to the sponsor
for cash upon employee termination or retirement.
Below are the transactions affecting equity received from contributions and
dividends to the ESOP:
(Thousands)
Common Additional Unallocated Obligation
Stock Paid-in Capital ESOP Shares to ESOP Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $295 $8,055 $(5,000) $(298) $3,052
- --------------------------------------------------------------------------------------------------------------------------------
Final ESOP obligation payment (1985 plan) 298 298
Dividends on allocated ESOP shares 147 147
Dividends on unallocated ESOP shares 207 207
Market value increase in ESOP shares released 172 172
Additional contributions 146 146
Tax benefit of ESOP dividend deduction 50 50
Loan to fund ESOP share repurchases (254) (254)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $295 $8,277 $(4,754) $ 0 $3,818
- --------------------------------------------------------------------------------------------------------------------------------
Dividends on allocated ESOP shares 255 255
Dividends on unallocated ESOP shares 172 172
Market value increase in ESOP shares released 244 244
Additional contributions 86 86
Net ESOP share purchases and distributions 24 1,186 1,210
Loans to fund ESOP share repurchases (1,574) (1,574)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $319 $9,707 $(5,815) $ 0 $4,211
- --------------------------------------------------------------------------------------------------------------------------------
51
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - EMPLOYEE BENEFIT PLAN
- -------------------------------
The Employee Thrift Plan (Plan) provides that all employees of Bank with
the requisite hours of service are eligible for the Plan. Bank fully matches the
first 2% and 50% of the subsequent 4% of individual employee contributions.
Employee voluntary contributions are vested at all times and Bank contributions
are fully vested after six years. Bank's 1996, 1995 and 1994 expense related to
the thrift plan totaled $203,000, $172,000 and $124,000, respectively, while
contributions were $203,000, $172,000 and $160,000, respectively.
NOTE 13 - OTHER EXPENSES
- ------------------------
The following is an analysis of other expenses:
(Thousands)
Year Ended December 31
1996 1995 1994
---- ---- ----
Supplies and printing $ 309 $ 379 $ 359
Advertising 489 414 369
Communication expense 492 444 375
Professional fees 516 486 458
Deposit insurance expense 8 340 673
Training expense 251 320 262
Outside services and consultants expense 642 625 501
Insurance Company expense 226 176
Corporate expenses 628 429 361
Other expenses 1,136 864 733
------ ------ ------
Total other expenses $4,697 $4,477 $4,091
====== ====== ======
52
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - INCOME TAXES
- ----------------------
The provision for income taxes consists of the following:
(Thousands)
Years ended December 31
1996 1995 1994
---- ---- ----
Current tax expense
Federal $ 886 $ 716 $ 1,268
State 356 288 383
Income tax refunds (954)
------- ------- -------
Total 1,242 50 1,651
Deferred tax provision (benefit) 357 117 (202)
------- ------- -------
Total provision for income taxes $ 1,599 $ 167 $ 1,449
======= ======= =======
In 1993, Horizon filed several amended tax returns to obtain refunds for
federal and state taxes paid in prior periods. The original returns were filed
dating back to 1985. A refund was received in 1995 of $954,000 plus $298,000 of
interest .
Temporary differences between the amounts reported in the financial
statements and the tax basis of assets and liabilities at December 31, 1996 and
1995, were as follows:
(Thousands)
1996 1995
---- ----
Gross deferred tax assets:
Allowance for losses on loans and other real estate $ 68 $ 763
Accrued operating expenses 100 43
Deferred loan fees 163 186
Depreciation 137
Other 561 433
------- -------
Total deferred tax assets 892 1,562
Valuation allowance (264)
------- -------
Subtotal 892 1,298
Gross deferred tax liabilities:
Depreciation (55)
Discount accretion (3) (107)
------- -------
Total deferred tax liabilities (58) (107)
Net deferred tax assets $ 834 $ 1,191
======= =======
53
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - INCOME TAXES (continued)
- ----------------------------------
The difference between the financial statement tax provision and amounts
computed by applying the statutory Federal income tax rate of 34% to income
before taxes is as follows:
(Thousands)
1996 1995 1994
---- ---- ----
Income taxes at the statutory Federal income tax rate $ 1,843 $ 1,090 $ 1,400
Add/(subtract) tax effect of:
Tax-exempt income (300) (334) (327)
Nondeductible expenses and other (285) 175 95
Federal and state tax refunds (954)
State tax, net of federal effect 341 190 281
------- ------- -------
Total provision for income taxes $ 1,599 $ 167 $ 1,449
======= ======= =======
Not included in the above tables, but directly impacting changes in
stockholders' equity were the effects of unrealized gains/(losses) on securities
of $60,000 and ($313,000) in 1996 and 1995.
NOTE 15 - REGULATORY MATTERS
- ----------------------------
Horizon and Bank are subject to regulatory capital requirements administered by
federal and banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately captialized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. Horizon is classified
as well capitalized as of December 31, 1996 and 1995. The minimum requirements
are:
Capital to risk-
weighted assets
-------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
54
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - REGULATORY MATTERS (continued)
- ----------------------------------------
Regulatory guidelines differ from generally accepted accounting principles
regarding the classification of "Equity received from contributions and
dividends to the ESOP." Under risk based capital guidelines, "Equity received
from contributions and dividends to the ESOP" is included in calculating total
and tier 1 capital ratios.
At year end, actual capital levels (in millions) and minimum required levels
were:
-----------------1996----------------- -----------------1995------------------
Minimum Required Minimum Required
To Be Well To Be Well
Actual Capitalized Actual Capitalized
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 35.8 13.6% $ 28.0 10.0% $ 35.0 16.66% $ 21.0 10.0%
Bank $ 32.7 13.5% $ 24.3 10.0% $ 31.6 15.36% $ 20.6 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 33.3 12.7% $ 16.8 6.0% $ 32.4 15.41% $ 12.6 6.0%
Bank $ 30.3 12.5% $ 14.6 6.0% $ 29.1 14.11% $ 12.4 6.0%
Tier 1 capital (to average assets)
Consolidated $ 33.3 8.2% $ 20.4 5.0% $ 32.4 8.4% $ 19.3 5.0%
Bank $ 30.3 8.2% $ 18.6 5.0% $ 29.1 8.2% $ 10.3 5.0%
55
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
- ---------------------------------------------
Presented below are condensed financial statements for the parent
company, Horizon Bancorp:
CONDENSED BALANCE SHEETS (Thousands)
-----------------------
December 31
ASSETS 1996 1995
---- ----
Total cash and cash equivalents $ 712 $ 661
Investment in Bank 30,473 29,737
Investment in Insurance Company 172 183
Investment in The Loan Store 433 498
Investment securities, net 1,404 1,430
Accrued interest receivable 20 16
Dividends receivable from Bank 1,000 400
Other assets 1,902 1,303
---------- --------
Total assets $ 36,116 $ 34,228
========= ========
LIABILITIES
Other liabilities $ 2,608 $ 1,857
---------- --------
Total liabilities 2,608 1,857
Equity received from contributions and dividends to the ESOP 4,211 3,818
STOCKHOLDERS' EQUITY 29,297 28,553
---------- --------
Total liabilities and stockholders' equity $ 36,116 $ 34,228
========= ========
CONDENSED STATEMENTS OF INCOME (Thousands)
- ------------------------------
For the years ended December 31
OPERATING INCOME/(EXPENSE) 1996 1995 1994
---- ---- ----
Dividend income from Bank $ 3,600 $ 1,600 $ 1,600
Investment income 123 92 60
Interest on federal and state income tax refunds 298
Other income 23 33 34
Interest expense (20) (6)
Employee benefits expense (1,399) (993) (376)
Other expense (238) (143) (124)
-------- -------- -------
INCOME BEFORE UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,109 867 1,188
UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,049 987 1,379
-------- -------- -------
INCOME BEFORE INCOME TAX 3,158 1,854 2,567
BENEFIT FOR INCOME TAX 666 1,185 101
-------- -------- -------
NET INCOME $ 3,824 $ 3,039 $ 2,668
======== ======== =======
56
57
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
(Thousands)
For the years ended December 31
1996 1995 1994
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,824 $ 3,039 $ 2,668
Adjustments to reconcile net income to
net cash from operating activities:
Undistributed income of Bank (1,125) (990) (1,379)
Undistributed loss of Insurance Company 11
Undistributed loss of Loan Store 65
Additional paid in capital from release of ESOP shares 244 172
Accretion (12)
Change in income taxes receivable (387) (173) (161)
Change in interest receivable (4) (9) (2)
Change in dividends receivable from Bank (600)
Change in other assets (1,343) 130 (93)
Change in other liabilities 751 614 184
----- ----- -----
Net cash from operating activities 1,424 2,783 1,217
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investment securities 36
Principal repayments of investment securities 26
Purchase of investment securities (1,006)
----- ----- -----
Net cash from investing activities 26 (1,006) 36
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in Insurance Company (47) (150)
Investment in Loan Store (500)
Dividends paid (1,031) (895) (919)
Purchase of treasury stock (368) (745) (233)
----- ----- -----
Net cash from financing activities (1,399) (2,187) (1,302)
----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS 51 (410) (49)
----- ----- -----
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 661 1,071 1,120
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 712 $ 661 $ 1,071
======= ======= ========
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest $ 0 $ 20 $ 9
Income taxes $ 0 $ (954) $ (35)
57
58
NOTES TO THE CONSOLIDATED STATEMENTS (CONTINUED)
NOTE 17 - STOCK OPTIONS
- -----------------------
Horizon maintains a Nonqualified Stock Option and Stock Appreciation Rights
Plan (Plan) under which options and stock appreciation rights (SARs) may be
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
remain available for grant at December 31, 1996 and 1995, however, outstanding
options may be exercised on a cumulative percentage basis until their
expiration.
Horizon recognizes compensation expense related to the 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's expense related to the Plan was $814,000
for 1996, $400,000 for 1995, and $217,000 for 1994.
A summary of transactions for the plan follows:
-------------Shares----------
Available Options
For Grant Outstanding Exercise Price
--------- ----------- --------------
Balance: December 31, 1990 10,000 75,000 $22.50 - $31.50
Granted (Expire January 27, 2001) (10,000) 10,000 $13.50
Forfeitures 500 (500) $13.50 - $31.50
--------- --------- ---------------
Balance: December 31, 1991 500 84,500 $13.50 - $31.50
Forfeitures 600 (600) $13.50
Expirations (1,100) --------- ---------------
--------
Balance: December 31, 1992 0 83,900 $13.50 - $31.50
========
Exercised (900) $28.00
Balance: December 31, 1993 83,000 $13.50 - $31.50
-------- ---------------
Balance: December 31, 1994 83,000 $13.50 - $31.50
Exercised (250) $34.75
--------
Balance: December 31, 1995 82,750 $13.50 - $31.50
Exercised (3,000) $41.25
--------
Balance: December 31, 1996 79,750 $13.50 - $31.50
======= ===============
At December 31, 1996 there were outstanding options for the purchase of
79,750 shares with exercise prices ranging from $13.50 to $31.50 per share. The
weighted average price of outstanding options was $26.20 and the weighted
average remaining life was 11.6 years.
58
59
NOTES TO THE CONSOLIDATED FINANCIAL STAEMENTS (CONTINUED)
NOTE 18 - 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.
Bank was required to have approximately $4,200,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and clearing
balance requirements at December 31, 1996. These balances are included in cash
and cash equivalents and do not earn interest.
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. 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. Bank follows the same credit policy to make such commitments as is
followed for those loans recorded in the financial statements.
As of December 31, 1996, commitments to make loans amounted to
approximately $34,810,000 and commitments under outstanding standby letters of
credit amounted to approximately $1,679,000. 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 of the borrower
and may include real estate, vehicles, business assets, deposits and other
items.
59
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Horizon Bancorp:
We have audited the accompanying consolidated balance sheets of HORIZON
BANCORP (an Indiana Corporation) and subsidiaries as of December 31, 1996, and
1995 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of HORIZON BANCORP and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 14, 1997
60
61
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the
consolidated financial statements and related notes on the preceding pages. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles 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 the Company'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 Arthur Andersen LLP, independent public accountants, for 1996, 1995,
and 1994. Their audits were conducted in accordance with generally accepted
auditing standards 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 generally accepted accounting
principles.
61
62
SUMMARY OF SELECTED FINANCIAL DATA
1996 1995 1994
---- ---- ----
EARNINGS
Total interest income $28,233 $26,262 $24,179
Total interest expense 11,800 11,112 9,356
Net interest income 16,433 15,150 14,823
Provision for loan losses 66 165
Total noninterest income 5,750 3,987 4,068
Total noninterest expense 16,694 15,931 14,609
Provision for income taxes 1,599 167 1,449
Income before cumulative effect of change in accounting principle 3,824 3,039 2,668
Cumulative effect of change in accounting principle
Net income 3,824 3,039 2,668
Cash dividend declared 1,031 895 919
PER SHARE DATA
Income before cumulative effect of change in accounting principle $5.19 $4.05 $3.48
Net income 5.19 4.05 3.48
Cash dividends declared 1.40 1.20 1.20
Book value at period end 46.40 43.18 36.00
Weighted average shares outstanding 736,887 750,286 767,419
PERIOD END TOTALS (Thousands)
Loans, net of deferred loan fees and unearned income $271,476 $241,662 $223,622
Allowance for loan losses 2,435 2,777 2,555
Total assets 382,038 368,013 369,470
Total deposits 289,180 288,984 295,784
Long-term debt 41,500 21,400 15,400
RATIOS
Loan to deposit 93.88% 83.62% 75.59%
Loan to total funding 79.03 72.80 65.98
Return on average total assets 1.04 0.86 0.75
Average stockholders' equity to average total assets 8.91 8.53 8.01
Return on average stockholders' equity 11.67 10.09 9.41
Dividend payout ratio (dividends divided by net income) 26.96 29.45 34.45
1993 1992
---- ----
EARNINGS
Total interest income $25,130 $28,527
Total interest expense 9,751 13,015
Net interest income 15,379 15,512
Provision for loan losses 276 1,201
Total noninterest income 3,771 3,951
Total noninterest expense 14,106 15,009
Provision for income taxes 1,665 1,492
Income before cumulative effect of change in accounting principle 3,103 1,761
Cumulative effect of change in accounting principle (152)
Net income 3,103 1,609
Cash dividend declared 923 794
PER SHARE DATA
Income before cumulative effect of change in accounting principle $4.02 $2.22
Net income 4.02 2.03
Cash dividends declared 1.20 1.00
Book value at period end 36.13 31.28
Weighted average shares outstanding 772,525 793,930
PERIOD END TOTALS (Thousands)
Loans, net of deferred loan fees and unearned income $219,139 $215,649
Allowance for loan losses 2,310 1,997
Total assets 364,001 357,460
Total deposits 306,135 301,426
Long-term debt 16,600 9,393
RATIOS
Loan to deposit 71.58% 71.54%
Loan to total funding 66.32 65.72
Return on average total assets 0.88 0.44
Average stockholders' equity to average total assets 7.58 7.19
Return on average stockholders' equity 11.61 6.19
Dividend payout ratio (dividends divided by net income) 29.75 49.35
62
63
SUMMARY OF SELECTED FINANCIAL DATA
Horizon common stock is traded on the over-the-counter market. The Chicago
Corporation is the principal broker in Horizon stock. The following table sets
forth, for the periods indicated, the high and low bid prices per share as
reported by The Chicago Corporation. The bid prices represent dealer prices and,
do not include retail mark-up, mark-down or commissions and may not represent
actual transactions. Also summarized below are the cash dividends declared by
quarter for 1996 and 1995.
Common Stock Dividends
Bid Prices Declared
1995 High Low Per Share
---- ---- --- ---------
First Quarter $33.00 $30.00 $.30
Second Quarter 33.63 33.00 .30
Third Quarter 34.50 33.63 .30
Fourth Quarter 35.50 34.50 .30
1996
----
First Quarter $41.00 $35.63 $.35
Second Quarter 42.00 38.00 .35
Third Quarter 44.00 41.00 .35
Fourth Quarter 47.00 42.63 .35
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, 1996 is 754.
FORM 10-K
Horizon will provide without charge to each stockholder upon written request to
Diana E. Taylor, Chief Financial Officer, Horizon Bancorp, 515 Franklin Square,
Michigan City, Indiana 46360, a copy of the Company'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 the Company's most recent
fiscal year.
63
64
BOARD OF DIRECTORS
- ------------------
DALE W. ALSPAUGH
CHANCELLOR
PURDUE UNIVERSITY N.C.
RUSSELL L. ARNDT
AGRICULTURIST
GEORGE R. AVERITT
RETIRED PUBLISHER -THE NEWS DISPATCH
JAMES D. BROWN
RETIRED
ROBERT C. DABAGIA
RETIRED PRESIDENT -HORIZON BANCORP
MYLES J. KERRIGAN
BOARD MEMBER, CHICAGO BOARD OF TRADE
PRESIDENT, NORTHWEST RACQUET CLUB
DONALD J. MANAHER*
PUBLISHER
THE NEWS DISPATCH
ROBERT E. MCBRIDE
PATHOLOGIST
NORTHERN INDIANA MEDICAL LABORATORY SERVICES, INC.
THOMAS P. MCCORMICK
PRESIDENT
HORIZON BANK
HORIZON BANCORP
LARRY N. MIDDLETON, JR.
PRESIDENT
CENTURY 21 MIDDLETON CO., INC.
BOYD W. PHELPS
VICE PRESIDENT
SEICO, INC.
LARRY E. REED
CHAIRMAN, CEO
HORIZON BANK
HORIZON BANCORP
GENE L. RICE
AGRICULTURIST
SUSAN D. STERGER
EXECUTIVE VICE PRESIDENT
MCKEE GROUP
ROBERT E. SWINEHART*
PRESIDENT
BEARING DIVISION
EMERSON POWER TRANSMISSION CORP.
*DIRECTOR OF HORIZON BANK ONLY
DIRECTORS EMERITUS
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JOHN A. GARRETTSON
RETIRED CHAIRMAN - HORIZON BANCORP
BURTON J. RUBY
RETIRED - JAYMAR RUBY, INC.
It is with deep regret that we note on January 18, 1997 the passing of
Russell R. McWhorter. Russ retired from Citizens Bank in May 1981 as Chairman of
the Board. He will be missed.
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OWNER EMPLOYEES
HORIZON BANK
SALES OFFICES
HORIZON BANK
SALES OFFICES
FRANKLIN SQUARE
Sherri Alonso
Kathryn Benkie
Brian Bishop
Stephen Brooks
Kelly Cavanaugh
Rhonda Henderson
Carla Kanney
Joann Krickhahn
Hong Le Mai
Sharon Meer
Joy Pawlak
Sherry Price
Maxine Schwartz
Heather Stanley
Maggie Vaughan
Valerie Vedron
JOHNSON ROAD
Teresa Baker
Jennie Cecil
Janet Downs
Sandra Miller
Lisa Poston
SOUTH FRANKLIN
Cindy Bolding
Betty Bowden
Daryl Crockett
Diane Dawson
Linda Earley
Laurie Gorski
A'Ric Jackson
Rosie Jones
Kelly Lowery
Darla Nespo
Lynn Neitzel
Elizabeth Olmo
Debra Richards
Roxann Zoborosky
LAPORTE
Sheryl Bowman
Kayde Darnell
JoAnn Decker
Stammy Ellinger
Doris Nevers
Sanna Palo
Nina Sampson
Mary Shultz
Gail Ulrich
Catherine Zawacki
PORTAGE
Michelle Flick
Linette Godfrey
Pamela Karner
Heidi Potzebowski
Christine Pouch
CHESTERTON
Racquel Mitchell
Karen Parrish
Julianne Whiteman
NORTH VALPARAISO
Kristin Campbell
Kathleen Lawrence
Phyllis Newkirk
Janet Williams
WANATAH
Norma Campbell
Beverly Hartman
Elaine Hefner
Evelyn Soplanda
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OWNER EMPLOYEES
COMMERCIAL LOANS
Sheri Anderson
Christopher Chatfield
Craig Dwight
Rita Stec
MORTGAGE LOANS
John Biddle
Janet Biernacki
Stacey Fisher-Koester
Jane Nelson
Debra Pedzinski
Robin Reider
Lois Swanson
CREDIT ADMINISTRATION
Darla Bowen
Kathy Callan
Stephen Dick
Rebecca Doperalski
Mary Kay Hanke
Franklin McCarty
Mary McColl
Cathy Poehl
Bonnie Piotrowski
Brenda Reiser
Yun-Ying Rempala
Gilbert Romero
Kellie Rusboldt
Sandra Skierkowski
Yolanda Thomas
Kathi Wolferd
AUDIT
Toni Geroluim
Rhonda McCausland
Rachel Saxon
JoAnn Swistek
LOAN REVIEW
Robert Holmes
INFORMATION SYSTEMS
Jane Barth
Thomas Bowman
Pamela Bricher
Brenda Brown
Amanda Childs
Cheryl Fisher
Shannon Gillem
Renee Hale
Andrea Hartke
Karen Jarrell
Teresa Jaske
Eunice Keppen
Michelle Krayniak
Joseph Mellen
Patricia Pierce
Cindy Pointon
Joseph Reed
William Retseck
David Rose
Barbara Simuel
Tammy Steinhagen
Ferdinand Tinio
Melanie Turner
Toni Whitfield
FINANCE
Beverly Foster
Myron Long
Sharon Meyers
Diana Taylor
Catherine Tempel
Julie Zippel
MARKETING
Jennifer DeHaven
Thad Donovan
Bette Novak
Eyvette Sellers
Rhonda Weirich
EXECUTIVE MANAGEMENT
Thomas McCormick
Marjorie McGill
Larry Reed
PURCHASING
Richard Carr
John Garrettson
Susan Henshaw
Rebecca Mazzaia
David Spears
HUMAN RESOURCES
Judy Dodge
Annerose Maron
Rae Rankin
Melanie Trowbridge
HUMAN DEVELOPMENT
Yvonne McGill
Tricia Rogers
ENROLLED IN TRAINING PROGRAM
Dalemarasha Cooper
Elizabeth Davis
Victoria Henry
Teresa Nims
Denise Moore
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OWNER EMPLOYEES
IMS INVESTMENT MANAGEMENT
Diana Alinsky
Mary Beth Atkinson
Susan Bietry
Leon Dargis
Patricia Finney
Jacquelyn Frymier
Nancy Hawkins
Brian Holt
Timothy Hurlbut
Susan Hunt
Janet Jasicki
Connie Johnston
Sandra Kazmucha
Bobbie Lange
Barbara Ludlow
Kristen Mallory
Kimberly Martin
Jason McDaniel
Justina Mejean
Brian Merrill
Mary Napier
Stephanie Oberlie
Cheryl Reinhart
Robert Rose
THE LOAN STORE
Emmett Burleson
Shirley Dowdell
David Levenhagen
Kathleen Mallory
Michael Pappas
Deron Robinson
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