10-Q 1 l09961ae10vq.txt HORIZON BANCORP 10-Q HORIZON BANCORP FORM 10-Q SECURITIES AND EXCHANGE COMMISSION 450 5th Street N.W. Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2004 Commission file number 0-10792 HORIZON BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1562417 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 879-0211 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,046,122 at November 3, 2004 PART 1 -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollar Amounts in Thousands) (All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split Declared October 21, 2003)
SEPTEMBER 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ------------ ------------ ASSETS Cash and due from banks $ 17,911 $ 28,434 Interest-bearing demand deposits 100 30 Federal funds sold 14,000 17,000 ------------ ------------- Cash and cash equivalents 32,011 45,464 Interest-bearing deposits 27,118 9,135 Investment securities, available for sale 205,972 215,695 Loans held for sale 1,811 8,213 Loans, net of allowance for loan losses of $7,031 and $6,909 497,528 440,809 Premises and equipment 17,390 16,460 Federal Reserve and Federal Home Loan Bank stock 11,202 10,853 Interest receivable 4,029 3,769 Other assets 19,008 7,045 ------------ ------------- Total assets $ 816,069 $ 757,443 ============ ============= LIABILITIES Deposits Noninterest bearing $ 59,880 $ 71,157 Interest bearing 551,238 475,011 ------------ ------------- Total deposits 611,118 546,168 Short-term borrowings 23,880 20,241 Federal Home Loan Bank advances 113,155 125,972 Subordinated debentures 12,372 12,372 Interest payable 731 751 Other liabilities 4,994 5,716 ------------ ------------- Total liabilities 766,250 711,220 ------------ ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, no par value Authorized, 1,000,000 shares No shares issued Common stock, $.2222 stated value Authorized, 22,500,000 shares Issued, 4,778,608 and 4,684,095 shares 1,062 1,041 Additional paid-in capital 22,729 20,994 Retained earnings 41,637 37,638 Restricted stock, unearned compensation (1,025) Accumulated other comprehensive income 1,789 2,075 Less treasury stock, at cost, 1,732,486 and 1,698,881 shares (16,373) (15,525) ------------ ------------- Total stockholders' equity 49,819 46,223 ------------ ------------- Total liabilities and stockholders' equity $ 816,069 $ 757,443 ============ =============
See notes to condensed consolidated financial statements 2 HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollar Amounts in Thousands, Except Per Share Data) (All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split Declared October 21, 2003)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- -------------------------- 2004 2003 2004 2003 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------ ----------- ----------- ----------- INTEREST INCOME Loans receivable $ 8,411 $ 9,431 $ 24,338 $ 26,681 Investment securities Taxable 1,641 1,115 5,195 3,404 Tax exempt 566 553 1,699 1,453 ------------ ----------- ----------- ----------- Total interest income 10,618 11,099 31,232 31,538 ------------ ----------- ----------- ----------- INTEREST EXPENSE Deposits 2,609 2,542 7,817 7,538 Federal funds purchased and short-term borrowings 94 142 274 322 Federal Home Loan Bank advances 1,358 1,663 4,177 4,749 Subordinated debentures 156 146 462 453 ------------ ----------- ----------- ----------- Total interest expense 4,216 4,493 12,730 13,062 ------------ ----------- ----------- ----------- NET INTEREST INCOME 6,402 6,606 18,502 18,476 Provision for loan losses 207 300 681 1,050 ------------ ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,195 6,306 17,821 17,426 ------------ ----------- ----------- ----------- OTHER INCOME Service charges on deposit accounts 807 818 2,308 2,346 Fiduciary activities 595 610 1,930 1,797 Commission income from insurance agency 56 66 329 201 Income from reinsurance company 19 14 48 Gain on sale of loans 770 1,116 1,713 3,327 Loss on sale of securities (267) (273) Other income 633 466 1,732 1,229 ------------ ----------- ----------- ----------- Total other income 2,861 2,828 8,026 8,675 ------------ ----------- ----------- ----------- OTHER EXPENSES Salaries and employee benefits 3,903 3,662 10,838 10,366 Net occupancy expenses 461 428 1,382 1,299 Data processing and equipment expenses 498 499 1,487 1,522 Other expenses 1,777 1,700 5,290 5,059 ------------ ----------- ----------- ----------- Total other expenses 6,639 6,289 18,997 18,246 ------------ ----------- ----------- ----------- INCOME BEFORE INCOME TAX 2,417 2,845 6,850 7,855 Income tax expense 654 817 1,767 2,328 ------------ ----------- ----------- ----------- Net Income $ 1,763 $ 2,028 $ 5,083 $ 5,527 ============ =========== =========== =========== BASIC EARNINGS PER SHARE $ .59 $ .68 $ 1.70 $ 1.86 DILUTED EARNINGS PER SHARE $ .56 $ .65 $ 1.63 $ 1.78
See notes to condensed consolidated financial statements. 3 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (Table Dollar Amounts in Thousands)
RESTRICTED ACCUMULATED ADDITIONAL STOCK, OTHER COMMON PAID-IN COMPREHENSIVE RETAINED UNEARNED COMPREHENSIVE TREASURY STOCK CAPITAL INCOME EARNINGS COMPENSATION INCOME STOCK TOTAL -------- --------- ------------- -------- ------------ ------------- -------- ----- BALANCES, DECEMBER 31, 2003 $ 1,041 $ 20,994 $ 37,638 $ 2,075 $(15,525) $46,223 Net income $ 5,083 5,083 5,083 Other comprehensive income, net of tax, unrealized losses on securities (286) (286) (286) --------- Comprehensive income $ 4,797 ========= Exercise of stock options 11 434 445 Tax benefit related to stock options 251 251 Purchase treasury stock (848) (848) Issuance of restricted stock 10 1,050 $ (1,060) Amortization of unearned compensation 35 35 Cash dividends ($.36 per share) (1,084) (1,084) -------- ---------- -------- -------- -------- ---------- ------- BALANCES, SEPTEMBER 30, 2004 1,062 $ 22,729 $ 41,637 $ (1,025) $ 1,789 $ (16,373) $49,819 ======== ========== ======== ======== ======== ========== =======
See notes to condensed consolidated financial statements. 4 HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 2004 2003 (UNAUDITED) (UNAUDITED) ----------- ----------- OPERATING ACTIVITIES Net income $ 5,083 $ 5,527 Items not requiring (providing) cash Provision for loan losses 681 1,050 Depreciation and amortization 1,132 1,133 Federal Home Loan Bank stock dividend (349) (203) Mortgage servicing rights (recovery) impairment (138) 127 Deferred income tax 594 (839) Investment securities amortization, net 364 826 Gain on sale of loans (1,713) (3,327) Proceeds from sales of loans 96,788 195,125 Loans originated for sale (88,673) (182,492) Gain on sale of other real estate owned (12) (34) Deferred loan fees 20 (21) Unearned income (201) (311) Loss on sale of securities 273 Loss on sale of fixed assets 3 4 Increase in cash surrender value of life insurance (414) Net change in Interest receivable (260) (322) Interest payable (20) (93) Other assets 82 741 Other liabilities (722) 675 ---------- ---------- Net cash provided by operating activities 12,245 17,839 ---------- ---------- INVESTING ACTIVITIES Net change in interest-bearing deposits (17,983) (25) Purchases of securities available for sale (79,753) (163,051) Proceeds from maturities, calls, and principal repayments of securities available for sale 88,674 52,749 Proceeds from sale of securities 27,178 Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (2,199) Net change in loans (57,472) 76,302 Proceeds from sale of fixed assets 43 Recoveries on loans previously charged-off 253 219 Proceeds from sale of other real estate owned 77 215 Purchases of premises and equipment (2,073) (817) Purchase of bank owned life insurance (12,000) ---------- ---------- Net cash used in investing activities (80,234) (9,429) ---------- ---------- FINANCING ACTIVITIES Net change in Deposits 64,950 45,941 Short-term borrowings 3,639 (3,845) Federal Home Loan Bank advance 63,300 152,998 Repayment of Federal Home Loan Bank advance (76,117) (164,138) Proceeds from issuance of stock Issuance of stock 696 119 Purchase of treasury stock (848) Dividends paid (1,084) (953) ---------- ---------- Net cash provided by financing activities 54,536 30,122 ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS (13,453) 38,532 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,011 $ 74,224 ========== ========== ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 12,736 $ 13,141 Income tax paid 903 2,600
See notes to condensed consolidated financial statements. 5 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1 -- ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A. (Bank), and HBC Insurance Group, Inc. (Insurance Company). All intercompany balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2004 and September 30, 2003 are not necessarily indicative of the operating results for the full year of 2004 or 2003. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon's management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon's Form 10-K annual report for 2003 filed with the Securities and Exchange Commission. The consolidated balance sheet of Horizon as of December 31, 2003 has been derived from the audited balance sheet of Horizon as of that date. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In August 2002, substantially all of the participants in Horizon's Stock Option and Stock Appreciation Rights Plans voluntarily entered into an agreement with Horizon to cap the value of their stock appreciation rights (SARS) at $14.67 per share and cease any future vesting of the SARS. These agreements with option holders make it more advantageous to exercise an option rather than a SAR whenever Horizon's stock price exceeds $14.67 per share, therefore the option becomes potentially dilutive at $14.67 per share or higher. The number of shares used in the computation of basic earnings per share is 2,991,203 and 2,976,846 for the nine-month period ended September 30, 2004 and 2003. The number of shares used in the computation of diluted earnings per share is 3,120,813 and 3,099,729 for the nine month period ended September 30, 2004 and 2003. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. 6 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1 - ACCOUNTING POLICIES (CONTINUED) Horizon accounts for the stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost related to the option plans is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. Compensation cost related to restricted stock awards is reflected in net income. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to the stock option plans.
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 ------------------------------- ------------ ------------ Net income, as reported $ 1,763 $ 2,028 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (16) (11) ------------ ------------ Pro forma net income $ 1,747 $ 2,017 ============ ============ Earnings per share Basic - as reported $ .59 $ .68 Basic - pro forma .58 .68 Diluted - as reported .56 .65 Diluted - pro forma .56 .65
NINE MONTHS ENDED SEPTEMBER 30 2004 2003 ------------------------------- ------------ ------------ Net income, as reported $ 5,083 $ 5,527 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (106) (75) ------------ ------------ Pro forma net income $ 4,977 $ 5,452 ============ ============ Earnings per share Basic - as reported $ 1.70 $ 1.86 Basic - pro forma 1.66 1.83 Diluted - as reported 1.63 1.78 Diluted - pro forma 1.59 1.76
NOTE 2 - INVESTMENT SECURITIES
2004 ---------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED FAIR SEPTEMBER 30 AMORTIZED COST GAINS LOSSES VALUE ------------ -------------- --------- ---------- ----- Available for sale U. S. Treasury and federal agencies $ 51,205 $ 27 $ (350) $ 50,882 State and municipal 55,717 2,655 (41) 58,331 Federal agency collateralized mortgage obligations 12,448 29 (9) 12,468 Federal agency mortgage backed pools 83,249 855 (465) 83,639 Corporate Notes 600 52 652 ------------- ---------------- ---------------- ------------- Total investment securities $ 203,219 $ 3,618 $ (865) $ 205,972 ============= ================ ================ =============
7 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
2003 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE ----------- --------- ---------- ---------- ----- Available for sale U. S. Treasury and federal agencies $ 66,945 $ 196 $(369) $ 66,772 State and Municipal 57,799 2,482 (51) 60,230 Federal agency collateralized mortgage obligations 14,354 176 (42) 14,488 Federal agency mortgage backed pools 72,806 747 (7) 73,546 Corporate notes 600 59 659 -------- ------ ----- -------- Total investment securities $212,504 $3,660 $(469) $215,695 ======== ====== ===== ========
The amortized cost and fair value of securities available for sale at September 30, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE ------------------------ AMORTIZED FAIR COST VALUE --------- -------- Within one year $ 1,958 $ 1,995 One to five years 50,223 50,135 Five to ten years 11,669 11,901 After ten years 43,672 45,834 -------- -------- 107,522 109,865 Federal agency collateralized mortgage obligations 12,448 12,468 Federal agency mortgage backed pools 83,249 83,639 -------- -------- $203,219 $205,972 ======== ========
Realized net gains and (losses) on the sale of securities available for sale are summarized as follows:
NINE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------- ----- Realized gains $ 140 Realized losses (413) ----- Net realized losses $(273) =====
There were no sales of securities available for sale during the nine months ending September 30, 2004. 8 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 3 - LOANS
SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------ ----------------- Commercial loans $ 187,536 $ 152,362 Mortgage warehouse loans 107,688 126,056 Real estate loans 77,961 67,428 Installment loans 131,374 101,872 --------- --------- 504,559 447,718 Allowance for loan losses (7,031) (6,909) --------- --------- Total loans $ 497,528 $ 440,809 ========= =========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ Allowance for loan losses Balances, beginning of period $ 6,909 $ 6,255 Provision for losses, operations 681 1,350 Recoveries on loans 253 288 Loans charged off (812) (984) ------- ------- Balances, end of period $ 7,031 $ 6,909 ======= =======
NOTE 5 - NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31 2004 2003 ------------- ----------- Nonperforming loans $1,480 $1,707 Other real estate owned 345 ------ ------ Total nonperforming assets $1,825 $1,707 ====== ======
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HORIZON BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 FORWARD - LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp ("Horizon" or "Company") and Horizon Bank, N.A. (Bank) and Horizon's other subsidiaries. Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Horizon, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Horizon's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on Horizon's future activities and operating results include, but are not limited to, changes in: interest rates, general economic conditions, legislative and regulatory changes, U.S. monetary and fiscal policies, demand for products and services, deposit flows, competition and accounting policies, principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. INTRODUCTION The purpose of this discussion is to focus on Horizon's financial condition, changes in financial condition and the results of operations in order to provide a better understanding of the consolidated financial statements included elsewhere herein. This discussion should be read in conjunction with the consolidated financial statements and the related notes. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. OVERVIEW For the first nine months of 2004, as anticipated, Horizon has experienced a decline in residential lending ACTIVITY. Therefore, gain on sale of loans and certain other categories of fee related to both the mortgage warehouse division and internal residential lending activities declined. Offsetting this decline, the commercial and consumer loan portfolios have experienced strong growth of 23% and 29% respectively since December 31, 2003. This growth is primarily attributed to expansion of lending activities into new markets. Net interest income is relatively constant compared to the same period of the prior year as growth in earning assets was offset by a decline in net interest margin. Other non-interest income has increased primarily due to income recognized from the purchase of bank owned life insurance in early January of 2004 and the improvement of the value of mortgage servicing rights due to the slow down in mortgage loan prepayment speeds. The bank owned life insurance income is considered tax exempt income, thereby reducing the effective tax rate for the year. Non-interest has increased approximately 4.1% due primarily to expansion into new markets and increased cost of employee benefits. CRITICAL ACCOUNTING POLICIES The notes to the consolidated financial statements included in Item 8 on Form 10-K contain a summary of the Company's significant accounting policies and are presented on pages 38-42 of Form 10-K for 2003. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy. An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management's ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. Horizon's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance may include factors such as local, regional, and national economic conditions and forecasts; and adequacy of loan policies and internal controls; the experience of the lending staff; bank regulatory examination results; and changes in the composition of the portfolio. Horizon considers the allowance for loan losses of $7.031 million adequate to cover losses inherent in the loan portfolio as of September 30, 2004. However, no assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management's ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. FINANCIAL CONDITION Liquidity The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the Federal Home Loan Bank (FHLB). During the nine months ended September 30, 2004, cash and cash equivalents decreased by approximately $13.5 million. These funds were used to increase loans outstanding. At September 30, 2004, in addition to liquidity provided from the normal operating, funding, and investing activities of Horizon, the Bank has available approximately $116 million in unused credit lines with various money center banks including the FHLB. There have been no other material changes in the liquidity of Horizon from December 31, 2003 to September 30, 2004. 11 Capital Resources The capital resources of Horizon and the Bank exceed regulatory capital ratios for "well capitalized" banks at September 30, 2004. Stockholders' equity totaled $49.819 million as of September 30, 2004 compared to $46.223 million as of December 31, 2003. The change in stockholders' equity during the nine months ended September 30, 2004 is the result of net income, net of dividends declared, a decrease in the market value of investment securities available for sale, purchase of treasury stock and the issuance of new shares related to the exercise of stock options. At September 30, 2004, the ratio of stockholders' equity to assets was 6.10% compared to 6.11% at December 31, 2003. During the course of a periodic examination by the Bank's regulators that commenced in February 2003, the examination personnel raised the issue of whether the Bank's mortgage warehouse loans should be treated as other loans rather than home mortgages for call report purposes. If these loans are treated as other loans for regulatory reporting purposes, it would change the calculations for risk-based capital and reduce the Bank's risk-based capital ratios. Management believes that it has properly characterized the loans in its mortgage warehouse loan portfolio for risk-based capital purposes, but there is no assurance that the regulators will concur with that determination. Should the call report classification of the loans be changed, Horizon and the Bank would still be categorized as well capitalized at September 30, 2004. There have been no other material changes in Horizon's capital resources from December 31, 2003 to September 30, 2004. Material Changes in Financial Condition - September 30, 2004 compared to December 31, 2003 During the first nine months of 2004, cash and cash equivalents decreased approximately $13.5 million, and loans outstanding increased approximately $56.8 million. The decrease in cash and cash equivalents is related to decreases in deposited items in the process of collection and overnight investments. Except for mortgage warehouse loans, all lending categories experienced growth during the period. Real estate loans increased due to adjustable rate mortgages held in the Bank's portfolio instead of being sold into the secondary market. Commercial loans increased primarily in loans secured by commercial real estate and commercial term loans with new customer relationships. Installment loan growth was primarily related to home equity loans and indirect automobile loans. Other assets increased due to the acquisition of Bank Owned Life Insurance. Deposits increased approximately $64.9 million during the first nine months of 2004. Noninterest bearing deposits decreased primarily from corporate and public fund deposits which moved to interest bearing categories. The growth in interest bearing deposits, occurred primarily in Money Market Accounts and public fund and brokered Certificates of Deposit acquired to fund the growth in earning assets during the first nine months of 2004. Short-term borrowings increased approximately $3.6 million to fund the growth in total loans outstanding. FHLB advances decreased approximately $12.8 million due the maturity of short-term advances. Horizon continues to monitor funding sources to reduce the cost of funds and maintain adequate liquidity. There have been no other material changes in the financial condition of Horizon from December 31, 2003 to September 30, 2004. On October 21, 2004, Horizon raised $10 million of additional capital through a private placement of trust preferred securities. The trust preferred securities will mature in 30 years and bear an initial interest rate of 4.05% per annum. The rate will adjust quarterly to three-month LIBOR plus 1.95%. Horizon expects to use the net proceeds from the offering for general corporate purposes, including providing funding for new market expansion and leveraging the additional Tier 1 capital through expansion of the investment portfolio. 12 RESULTS OF OPERATIONS Material Changes in Results of Operations - Nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. During the nine months ended September 30, 2004, net income totaled $5.083 million or $1.63 per diluted share compared to $5.527 million or $1.78 per diluted share for the same period in 2003. Net interest income was $18.502 million for the nine months ended September 30, 2004, compared to $18.476 million for the same period of 2003. Average earning assets increased to $745 million for the nine month period ended September 30, 2004 from $701 million for the same period of the prior year. The net interest margin for the same period of both years declined to 3.37% for the 2004 period, from 3.58% for the 2003 nine month period. The growth in average earning assets came in the investment portfolio, which increased approximately $80 million on average from the same period of the prior year, primarily in callable agency securities, mortgage backed securities and tax exempt municipal securities. Average loans outstanding decreased to $497 million from $522 million for the first nine months of 2003. A decline in average mortgage warehouse loans to $135 million during the first nine months of 2004 from $251 million during the first nine months of the prior year was partially offset by growth in the other loan categories. Growth in average loans outstanding for the other loan categories from the first nine months of 2003 compared to the first nine months of 2004 was as follows: Commercial loans $47 million, Consumer loans $28 million, residential real estate loans $16 million. The increase in the investment portfolio was at lower yields, which caused the decline in net interest margin. Also effecting net interest income was the investment of $12 million in Bank Owned Life Insurance early in 2004. The income from this investment is treated as noninterest income. The provision for loans losses totaled $681 thousand for the nine months ended September 30, 2004 compared to $1.050 million for the same period of the prior year. The decrease in the provision is primarily due to continued favorable nonperforming loan and charge-off experience. Total noninterest income was $8.026 million for the nine months ended September 30, 2004 compared to $8.675 million for the same period in 2003. Gain on sale of loans declined due to a reduction in mortgage origination volume as the total loans sold during the first nine months declined from $195 million in 2003 to $96 million in 2004, a 51% decline. Partially offsetting the decline in gain on sale of loans is increased income from the Bank Owned Life Insurance and recovery of impairment on the mortgage servicing asset. Noninterest expense increased $751 thousand or 4.1% for the nine months ended September 30, 2004 compared to the same period in 2003. The majority of the increase relates to expansion into new markets and increased cost of employee benefits. There have been no other material changes in the results of operations of Horizon for the nine months ending September 30, 2004 and 2003. Material Changes in Results of Operations - Three months ended September 30, 2004 compared to the three months ended September 30, 2003 All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. During the three months ended September 30, 2004, net income totaled $1.763 million or $.56 per diluted share compared to $2.028 million or $.65 per diluted share for the same period in 2003. Net interest income was $6.402 million for the three months ended September 30, 2004, compared to $6.606 million for the same period 2003. This decrease was the result of a decrease in net interest 13 margin from 3.58% in the third quarter of 2003 to 3.43% in the current quarter. The decrease was caused by a decrease in average mortgage warehouse loans outstanding from $275 million in the third quarter of 2003 to $122 million in the current quarter. These funds were re-deployed into other loan types and investment securities, which carry lower yields than the mortgage warehouse loans. Commercial loans increased from an average of $129.7 million for the third quarter of 2003 to $179.9 million for the current quarter. Consumer loans increased from an average of $91.7 million for the third quarter of 2003 to $125.3 million for the third quarter of the current year. Average earning assets were relatively constant from the third quarter of last year to this year; however, due to the change in mix of earning assets, declines were experienced in net interest margin and therefore net interest income. The provision for loan losses totaled $207 thousand for the three months ended September 30, 2004 compared to $300 thousand for the same period of the prior year. The decrease in the provision is primarily due to continued favorable nonperforming loan and charge-off experience. The allowance for loan losses to total loans is 1.39% at September 30, 2004 compared to 1.54% at December 31, 2003. Total non-interest income was $2.861 million for the three months ended September 30, 2004, compared to $2.828 million for the same period in 2003. The decline in gain on sale of loans was offset by increased income from bank owned life insurance and no losses were recognized on the sale of securities in 2004 compared to a loss of $267 thousand recognized in the third quarter of 2003. Noninterest expense increased $350 thousand or 5.6% for the three months ended September 30, 2004 compared to the same period in 2003. The increase relates to staffing and for new market expansion and increased cost of employee benefits. There have been no other material changes in the results of operations of Horizon for three months ending September 30, 2004 and 2003. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Horizon currently does not engage in any derivative or hedging activity. Refer to Horizon's 2003 Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2003 Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Based on an evaluation of disclosure controls and procedures as of September 30, 2004, Horizon's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon's disclosure controls (as defined in Exchange Act Rule 13a-15(e)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon's disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness. Changes In Internal Controls Since the evaluation date, there have been no significant changes in Horizon's internal controls or in other factors that could significantly affect such controls. 15 HORIZON BANCORP AND SUBSIDIARIES PART II - OTHER INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ISSUER PURCHASES OF EQUITY SECURITIES There were no purchases by the Company of its common stock during the quarter. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Horizon has posted its Code of Conduct for Executive Officers and Directors and its Advisor Code of Conduct and Ethics on its web site at www.accesshorizon.com ITEM 6. EXHIBITS Exhibits Exhibit 11 Statement Regarding Computation of Per Share Earnings Exhibit 31.1 Certification of Craig M. Dwight Exhibit 31.2 Certification of James H. Foglesong Exhibit 32 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORIZON BANCORP 11.9.2004 /s/ Craig M. Dwight --------- ------------------- Date BY: Craig M. Dwight President and Chief Executive Officer 11.8.2004 /s/ James H. Foglesong --------- ---------------------- Date BY: James H. Foglesong Chief Financial Officer 17 INDEX TO EXHIBITS The following documents are included as Exhibits to this Report. Exhibit ------- 11 Statement Regarding Computation of Per Share Earnings 31.1 Certification of Craig M. Dwight 31.2 Certification of James H. Foglesong 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 18