-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M2FePqr0dW6/mFQWYw06c82PSP7LP8xVib9VpVSVdLIf5mTQEm2HM9Gf2t5L+QMG ZCjyIdqD/7g0RuDW09pn2w== 0000950152-98-002833.txt : 19980401 0000950152-98-002833.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950152-98-002833 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON BANCORP /IN/ CENTRAL INDEX KEY: 0000706129 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351562417 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10792 FILM NUMBER: 98581736 BUSINESS ADDRESS: STREET 1: 515 FRANKLIN SQ CITY: MICHIGAN CITY STATE: IN ZIP: 46360 BUSINESS PHONE: 2198790211 MAIL ADDRESS: STREET 1: 515 FRANKLIN SQ CITY: MICHIGAN CITY STATE: IN ZIP: 46360 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS MICHIANA FINANCIAL CORP DATE OF NAME CHANGE: 19861021 10-K405 1 HORIZON BANCORP ANNUAL REPORT FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from 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 incorporation or organization Identification No.) 515 Franklin St., 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: Title of each class Name of each exchange on which registered None -------------- ---------------------- Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value, 696,366 shares outstanding at March 18, 1998 ------------------------------------------------------------------------ (Title of class) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K X . ---- The aggregate market value of the registrant's common stock held by nonaffiliates of the registrant, based on the bid price of such stock on March 18, 1998 was $32,375,000. 2 Documents Incorporated by Reference ----------------------------------- Part of Form 10-K into which Document portion of document is incorporated -------- ----------------------------------- Portions of the Registrant's 1997 I, II, VI annual report to shareholders Portions of the Registrant's III proxy statement to be filed for its May 28,1998 annual meeting of shareholders Except as provided in Part I, Part II and Part III, no part of the Registrant's 1997 annual report to shareholders or proxy statement shall be deemed incorporated herein by this reference or to be filed with the Securities and Exchange Commission for any purposes. 2 3 PART I ------ ITEM 1. BUSINESS (a) General Development of Business -------------------------------- Horizon Bancorp, a registered bank holding company organized under the laws of the State of Indiana on April 26, 1983, (Registrant), became the parent corporation and sole shareholder of The First Merchants National Bank of Michigan City pursuant to a plan of reorganization effective October 31, 1983. Prior to October 31, 1983, the Registrant conducted no business and had only nominal assets necessary to complete the plan of reorganization. On October 1, 1986 the Registrant issued 399,340 shares of its common stock in exchange for all of the common stock of Citizens Michiana Financial Corporation in connection with mergers of such companies and their subsidiaries. Subsequent to the merger, the Registrant remains a one-bank holding company with a wholly-owned subsidiary, Horizon Bank, N.A. (Bank) and Bank's wholly-owned subsidiary, IMS Investment Management, N.A. (IMS) and non-bank subsidiaries, HBC Insurance Group (Insurance Company) and The Loan Store, Inc., (Loan Store). (b) Financial Information About Industry Segments --------------------------------------------- The Registrant, Bank and its subsidiaries are engaged in the commercial and retail banking business, investment management services, retail lending and insurance credit life sales. Refer to Item 1(e) and Item 6 for information pertaining to Registrant's banking business. (c) Narrative Description of Business --------------------------------- The Registrant's business is that incident to its 100% ownership of Bank, Loan Store and the Insurance Company. The main source of funds for the Registrant is dividends from Bank. Bank was chartered as a national bank association in 1873 and has operated continuously since that time. Bank, whose deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law, is a full-service commercial bank offering a broad range of commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Bank maintains five facilities located exclusively within LaPorte County, Indiana and four facilities located in Porter County, Indiana. At December 31, 1997, Bank had total assets of $359,751,000 and total deposits of $264,413,000. Aside from the stock of Bank, Insurance Company and Loan Store, the Registrant's only other significant assets are cash and cash equivalents totaling approximately $864,000, investment securities totaling approximately $401,000 and taxes receivable of approximately $1,323,000 at December 31, 1997. The business of the Registrant, Bank, IMS, Insurance Company and Loan Store is not seasonal to any material degree. No material part of the Registrant's business is dependent upon a single or small group of customers, the loss of any one or more of whom would have a materially adverse effect on the business of the Registrant. Revenues from loans accounted for 72% in 1997, 68% in 1996, and 67% in 1995 of the total consolidated revenue. Revenues from investment securities accounted for 14% in 1997, 15% in 1996 and 20% in 1995 of total consolidated revenue. The Registrant has no employees and there are approximately 180 full and part-time persons employed by Bank , IMS and Loan Store as of December 31, 1997. A high degree of competition exists in all major areas where the Registrant engages in business. Bank's primary market consists of LaPorte County, Indiana, Porter County, Indiana, and Berrien County, Michigan. Bank competes with commercial banks located in the home county and contiguous counties in Indiana and Michigan, as well as with savings and loan associations, consumer finance companies, and credit unions located therein. To a more moderate extent, Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services, and certain government agencies. 3 4 The Insurance Company offers credit life and accident and health insurance. The Loan Store, Inc. is engaged in the business of retail lending and operates four facilities in Northwest Indiana. The net income generated from the Insurance Company and the Loan Store are not significant to the overall operations of the Registrant. Regulation ---------- The earnings and growth of the banking industry and the Registrant are affected not only by the general economic conditions, but also by the credit policies of monetary authorities, particularly the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to contest recessionary trends and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve System to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve System have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and the money markets, and as a result of actions by monetary and fiscal authorities, including the Federal Reserve System, interest rates, credit availability and deposit levels may change due to circumstances beyond the control of the Registrant or Bank. The Registrant, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (Act), and is registered with the Board of Governors of the Federal Reserve System (Board of Governors). Under the Act, the Registrant is required to obtain prior approval of the Board of Governors before acquiring direct ownership or control of more than 5% of the voting shares of any bank. With certain exceptions, the Act precludes the Registrant from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to its subsidiary. The Registrant may engage in, and may own shares of companies engaged in, certain activities found by the Board of Governors to be so closely related to banking as to be a proper incident thereto. The Registrant is required to file annual reports of its operations with the Board of Governors and such additional information as they may require pursuant to the Act, and the Registrant and Bank are subject to examination by the Board of Governors. Further, the Registrant and Bank are prohibited from engaging in certain tie-in arrangements with respect to any extension of credit or provision of property or services. The Board of Governors also possesses the authority through cease and desist powers to regulate parent holding company and nonbank subsidiaries where action of a parent holding company or its nonbank subsidiaries constitutes a serious threat to the safety, soundness or stability of a subsidiary bank. Federal bank regulatory agencies also have the power to regulate debt obligations issued by bank holding companies. Included in these powers is the authority to impose interest ceilings and reserve requirements on such debt obligations. The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve and, for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Further, Indiana law permits interstate bank holding company acquisitions on a reciprocal basis, subject to certain limitations. Beginning July 1, 1992, Indiana law permits the Registrant to acquire banks, and be acquired by bank holding companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies. The Registrant, Bank, IMS, Insurance Company and Loan Store are "affiliates" within the meaning of the Federal Reserve Act. The Federal Reserve Act and the Federal Deposit Insurance Act limit the amount of the Bank's loans or extensions of credit to affiliates, its investments in the stock or other securities thereof, and its taking of such stock or securities as collateral for loans to any borrower. 4 5 Bank, as a national bank, is regulated and regularly examined by the Office of the Comptroller of the Currency (OCC). In addition to certain statutory limitations on the payment of dividends, approval of the OCC is required for any dividend to the Registrant by Bank if the total of all dividends, including any proposed dividend, declared by Bank in any calendar year exceeds the total of its net profits (as defined by the OCC) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. The Federal Reserve Board implemented risk-based capital requirements for banks and bank holding companies in December, 1988. The risk-based capital requirements have little effect on the Registrant because existing capital is in excess of the requirements. (See additional discussion in Management's Discussion and Analysis in Registrant's Annual Report to Shareholders, Exhibit 13.) (d) Financial Information about Foreign and Domestic Operations and --------------------------------------------------------------- Export Sales ------------ None (e) Statistical Disclosures ----------------------- I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL Information required by this section of Securities Act Industry Guide 3 is presented in Management 's Discussion and Analysis Section of the Corporation's 1997 Annual Report to Shareholders. II. INVESTMENT PORTFOLIO (A) The following is a schedule of the book value of investment securities available for sale and held to maturity at December 31, 1997, 1996 and 1995:
(Thousands) 1997 1996 1995 AVAILABLE FOR SALE U.S. Treasury and U.S. Government agencies and corporations $3,965 $4,965 $7,165 Mortgage-backed securities 39,985 49,683 62,717 Other securities 4,020 4,248 4,281 Unrealized gain/(loss) 668 145 779 -------------------------------------------------------- Total investment securities available for sale $48,638 $59,041 $74,942 ======================================================== HELD TO MATURITY U.S. Treasury and U.S. Government agencies and corporations $4,965 $2,793 $3,164 Obligations of states and political subdivisions 9,407 10,017 9,003 -------------------------------------------------------- Total investment securities held to maturity $14,372 $12,810 $12,167 ======================================================== Total investment securities available for sale and held to maturity $63,010 $71,851 $87,109 ========================================================
5 6 II. INVESTMENT PORTFOLIO (Continued) (B) The following is a schedule of maturities of each category of debt securities and the related weighted average yield of such securities as of December 31, 1997:
One year or less After one year After five years After ten years through five years through ten years (Thousands) Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------------------------- AVAILABLE FOR SALE U.S. Treasury and U.S. Government $2,080 8.05% $1,695 6.56% $250 6.66% agency securities(1) Other securities 4,015 7.50% Mortgage-backed securities (2) 954 6.84% 11,952 7.08% 27,692 6.98% ------------------------------------------------------------------------------------- Total $6,095 7.69% $2,649 6.66% $12,202 7.07% $27,692 6.98% HELD TO MATURITY U.S. Government agency securities $2,040 7.42% Obligations of states and political 1,309 3.97% 2,666 4.75% 5,432 5.05% subdivisions ------------------------------------------------------------------------------------- Total $3,349 6.07% $2,666 4.75% $5,432 5.05% $0 0.00% Total investment securities available $9,444 7.11% $5,315 5.70% $17,634 6.45% $27,692 6.98% for sale and held to maturity (1) Amortized cost is based on contractual maturity or call date where a call option exists (2) Maturity based upon maturity date
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis. (C) Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer which exceeded 10% of the consolidated stockholders' equity of the Registrant at December 31, 1997. III. LOAN PORTFOLIO (A) Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31 for the years indicated.
(Thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------ Commercial, financial, agricultural and $73,177 $75,460 $66,125 $67,177 $64,645 commercial tax-exempt loans Real estate mortgage loans 120,345 133,739 119,739 105,512 103,693 Installment loans 64,593 62,277 55,798 50,933 52,880 ------------------------------------------------------------------------------ Total loans $258,115 $271,476 $241,662 $223,622 $221,218 ==============================================================================
6 7 III. LOAN PORTFOLIO (Continued) (B) Maturities and Sensitivities of Loans to Changes in Interest Rates - The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage and installment loans, as of December 31, 1997:
Maturing or repricing (thousands) One year or One through After five Total less five years years ---------------------------------------------------------- Commercial, financial, agricultural and $33,873 $31,443 $7,861 $73,177 commercial tax-exempt loans
The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)
(Thousands) Fixed Rate Variable Rate -------------------------------- Total commercial, financial, $29,547 $9,757 agricultural, and commercial tax-exempt loans due after one year
(C) Risk Elements 1. Nonaccrual, Past Due and Restructured Loans - The following schedule summarizes nonaccrual, past due and restructured loans.
December 31 (thousands) 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------- (a) Loans accounted for on a nonaccrual $319 $316 $668 $2,794 $1,687 basis (b) Accruing loans which are contractually 862 682 533 474 481 past due 90 days or more as to interest and principal payments (c) Loans not included in (a) or (b) which are "Troubled Debt Restructuring's" as defined by SFAS No. 15 ---------------------------------------------------------------------------- Totals $1,181 $998 $1,201 $3,268 $2,168 ============================================================================
The decrease in nonaccrual loans in 1995 is primarily due to three loans which were returned to an accruing basis. These loans had sustained required payment performance over the last six months or longer. The increase in nonaccrual loans in 1994 is due primarily to three loans for approximately $1,500,000, secured by real estate and having common ownership. These loans were placed on nonaccrual in April and May of 1994. 7 8 III. LOAN PORTFOLIO (Continued) (Thousands) Gross interest income that would have been $32 recorded on nonaccrual loans out standing as of Decmber 31, 1997 in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period. Interest income actually recorded on 0 nonaccrual loans outstanding as of December 31, 1997 and included in net income for the period. Interest income not recognized during the $32 period on nonaccrual loans outstanding as of December 31, 1997.
Discussion of Nonaccrual Policy From time to time, the Bank obtains information which may lead management to believe that the collection of interest may be doubtful on a particular loan. In recognition of such, it is management's policy to convert the loan from an "earning asset" to a nonaccruing loan. Further, it is management's policy to place a commercial loan on a nonaccrual status when delinquent in excess of 90 days, unless the Loan Committee approves otherwise. All loans placed on nonaccrual status must be reviewed by the officer responsible for the loan, the senior lending officer and the loan review officer. The loan review officer monitors the loan portfolio for any potential problem loans. 2. Potential Problem Loans Loans where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms, and not included in Section 1 above, amount to $44,000 at December 31, 1997. Loan customers included in this category are having financial difficulties at the present time and may need adjustments in their repayment terms. Payments are anticipated or collateral or guarantees are available to reduce any possible loss. These loans and potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed in Section 1 above. Management believes that these loans do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or management believes that these loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. 3. Foreign outstandings None 4. Loan Concentrations As of December 31, 1997 there are no significant concentrations of loans exceeding 10% of total loans other than those disclosed in Item III above. 8 9 III. LOAN PORTFOLIO (Continued) (D) Other Interest-Bearing Assets Other than $125,000 held as other real estate owned, net of allowance, there are no other interest-bearing assets as of December 31, 1997 which would be required to be disclosed under Item III C.1 or 2 if such assets were loans. IV. SUMMARY OF LOAN LOSS EXPERIENCE (A) The following is an analysis of the activity in the allowance for loan losses account:
(Thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------- LOANS Loans outstanding at the end of the period (1) 258,115 271,476 241,662 223,622 219,139 Average loans outstanding during the period (1) 269,348 256,580 226,198 218,053 214,033 (1) Net of unearned income and deferred loan fees ALLOWANCE FOR LOAN LOSSES 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------- Balance at beginning of the period $2,435 $2,777 $2,555 $2,310 $1,997 Loans charged-off: Commercial and agricultural loans (56) (11) (45) (213) Real estate mortgage loans (1) (14) (17) Installment loans (1,384) (532) (231) (221) (343) ------- ------ ----- ----- ----- Total loans charged-off (1,441) (557) (293) (221) (556) Recoveries of loans previously charged-off: Commercial and agricultural loans 50 27 358 143 339 Real estate mortgage loans 8 Installment loans 333 122 149 158 254 --- --- --- --- --- Total loan recoveries 383 149 515 301 593 Net loans (charged-off)/recovered (1,058) (408) 222 80 37 Provision charged to operating expense 1,325 66 165 276 ------------------------------------------------------------------------------- Balance at the end of the period $2,702 $2,435 $2,777 $2,555 $2,310 =============================================================================== Ratio of net (charge-offs)/recoveries to average (0.39)% (0.16)% 0.10% 0.04% 0.02% loans outstanding for the period
The increase in the provision for loan losses in 1997 was the result of increased charge-offs identified in the installment loan portfolio, specifically direct consumer loans and credit cards. Management believes that by mid-1998, the volume of charge-offs in these portfolios will begin to reduce and that a more normal provision will be re-instated. Management expects charge-offs in all other portfolios to remain at the 1997 levels. 9 10 IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued) (B) The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and the percentage of loans in each category to total loans. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31. (THOUSANDS)
1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------------------------ ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------------------------------------------------------------------------------------------------------------------ Commercial, $765 0.3% $576 0.2% $733 0.3% $1,434 0.6% $1,064 0.5% financial and agricultural Real estate 82 0.0% 102 0.0% 139 0.1% 111 0.0% 171 0.1% mortgage Installment 1,290 0.5% 1,075 0.4% 655 0.3% 407 0.2% 514 0.2% Unallocated 565 682 1,250 603 561 ------------------------------------------------------------------------------------------------------------------ Total $2,702 1.0% $2,435 0.9% $2,777 1.1% $2,555 0.9% $2,310 1.1% ==================================================================================================================
The increase in the reserve allocation for installment loans from 1995 to 1996 is primarily the result of the change in methodology for the historical portion of the allowance calculation. In 1996, the Bank began using the industry average charge-off rate instead of the Bank's historical charge-off rate which was used in previous years. This change in methodolgy resulted in a $325 increase in the portion of the allowance allocated to installment loans in 1996. V. DEPOSITS Information required by this section is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13. VI. RETURN ON EQUITY AND ASSETS Information required by this section is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13. 10 11 VII. SHORT-TERM BORROWINGS The following is a schedule of statistical information relative to securities sold under agreements to repurchase which were secured by U.S. Treasury and U.S. Government agency securities and mature within one year. This product was discontinued on January 1, 1997. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period.
(Thousands) 1997 1996 1995 ----------------------------------------------- Outstanding at year end $0 $11,562 $9,558 Approximate weighted average interest 0.00% 5.14% 5.52% rate at year-end Highest amount outstanding as of any $0 $14,822 $16,446 month-end during the year Approximate average outstanding during $0 $10,961 $8,196 the year Approximate weighted average interest 0.00% 5.07% 5.65% rate during the year
ITEM 2. PROPERTIES - ------------------- The main office of the Registrant and Bank is located at 515 Franklin Square, Michigan City, Indiana. The building located adjacent to the main office of the Registrant and Bank, at 502 Franklin Square, houses the credit administration, operations and micro-computer departments of Bank. In addition to these principal facilities, the Bank has eight sales offices located at: 5477 Johnson Road, Michigan City, Indiana 3631 South Franklin Street, Michigan City, Indiana 117 E First St., Wanatah, Indiana 1410 Lincolnway, LaPorte, Indiana 754 Indian Boundary Road, Chesterton, Indiana 3125 N. Calumet, Valparaiso, Indiana 6504 U.S. Highway 6, Portage, Indiana 265 U.S. Highway 30, Valparaiso, Indiana The Loan Store has sales offices at the following locations: 200 W 80th Place, Suite C, Merriville, Indiana 8343 Indianapolis Blvd. , Highland, Indiana 6313 University Commons, South Bend, Indiana 5176 South Franklin, Michigan City, Indiana ITEM 3. LEGAL PROCEEDINGS - -------------------------- The information required under this Item is incorporated by reference to the information appearing under the caption "Note 18 - Commitments, Off-Balance Sheet Risk and Contingencies" of the registrants Annual Report to Shareholders, Exhibit 13. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of the Registrant's stockholders during the fourth quarter of the 1997 fiscal year. 11 12 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ The information required under this item is incorporated by reference to the information appearing under the caption "Market for Horizon's Common Stock and Related Stockholder Matters" of the Registrant's Annual Report to Shareholders, Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The information required under this item is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Management's discussion and analysis of financial condition and results of operations appears in the 1997 Annual report to Shareholders, Exhibit 13 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated financial statements and supplementary data required under this item are incorporated herein by reference to the Annual Report to Shareholders, Exhibit 13. The Registrant is not required to furnish the supplementary financial information specified by Item 302 of Regulation S-K. Consolidated Balance Sheets, December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to the Consolidated Financial Statements Report of Independent Public Accountants ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- The disclosures required under this item are incorporated by reference to the Registrant's Forms 8-K, Exhibit 16. PART III Information relating to the following items will be included in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held May 28, 1998 ("1998 Proxy Statement"). The 1998 Proxy Statement will be filed with the Commission within one hundred twenty days of the close of the Registrant's last fiscal year and is in part incorporated into this Form 10-K Annual Report by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- 12 13 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a) 1. Financial Statements The following consolidated financial statements of the Registrant appear in the 1997 annual report to shareholders on the pages referenced and are specifically incorporated by reference under Item 8 of this Form 10-K:
Annual Report Page Number ----------- Consolidated Balance Sheets 21 Consolidated Statements of Income 22 Consolidated Statements of Changes in Stockholders' Equity 23 Consolidated Statements of Cash Flows 24 Notes to the Consolidated Financial Statements 25 - 43 Report of Independent Public Accountants 44
(a) 2. Financial Statement Schedules ----------------------------- Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements. (a) 3. Exhibits -------- Reference is made to the Exhibit Index which is found on page 16 of this Form 10-K. (b) Reports on Form 8-K ------------------- None Exhibits - -------- (c) Reference is made to the Exhibit Index which is found on page 16 of his Form 10-K. (d) Financial Statement Schedules ----------------------------- Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements. 13 14 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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 ---------------------------------------- (Registrant) Date March 31, 1998 /s/ Larry E. Reed ------------------ ----------------------------------- Larry E. Reed Chairman & Chief Executive Officer Date March 31, 1998 /s/ Thomas P. McCormick ------------------ ----------------------------------- Thomas P. McCormick President Date March 31, 1998 /s/ Diana E. Taylor ------------------ ----------------------------------- Diana E. Taylor Chief Financial Officer/Secretary/Treasurer 14 15 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Signature and Title ---- ------------------- March 31, 1998 /s/ Dale W. Alspaugh - ------------------ ----------------------------------- Dale W. Alspaugh, Director March 31, 1998 /s/ Russell L. Arndt - ------------------ ----------------------------------- Russell L. Arndt, Director March 31, 1998 /s/ George R. Averitt - ------------------ ----------------------------------- George R. Averitt, Director March 31, 1998 /s/ James D. Brown - ------------------ ----------------------------------- James D. Brown, Director March 31, 1998 /s/ Robert C. Dabagia - ------------------ ----------------------------------- Robert C. Dabagia, Director March 31, 1998 /s/ Myles J. Kerrigan - ------------------ ----------------------------------- Myles J. Kerrigan, Director March 31, 1998 /s/ Donald J. Manaher - ------------------ ----------------------------------- Donald J. Manaher, Director March 31, 1998 /s/ Robert E. McBride - ------------------ ----------------------------------- Robert E. McBride, Director March 31, 1998 /s/ Thomas P. McCormick - ------------------ ----------------------------------- Thomas P. McCormick, Director President March 31, 1998 /s/ Boyd W. Phelps - ------------------ ----------------------------------- Boyd W. Phelps, Director March 31, 1998 /s/ Larry E. Reed - ------------------ ----------------------------------- Larry E. Reed, Director Chairman & Chief Executive Officer March 31, 1998 /s/ Gene L. Rice - ------------------ ----------------------------------- Gene L. Rice, Director March 31, 1998 /s/ Susan D. Sterger - ------------------ ----------------------------------- Susan D. Sterger, Director March 31, 1998 /s/ Robert E. Swinehart - ------------------ ----------------------------------- Robert E. Swinehart, Director 15 16 EXHIBIT INDEX ------------- The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBERS - ------ ----------- ------------ 3.1 ARTICLES OF INCORPORATION OF HORIZON BANCORP INCORPORATED BY REFERENCE TO 12/31/89 FORM 10-K 3.2 BY-LAWS OF HORIZON BANCORP INCORPORATED BY REFERENCE TO 12/31/91 FORM 10-K 10.1 MATERIAL CONTRACTS-AGREEMENT REGARDING INCORPORATED BY REFERENCE EMPLOYMENT CONTRACTS TO 12/31/87 FORM 10-K 10.2 MATERIAL CONTRACTS-1987 STOCK OPTION AND INCORPORATED BY REFERENCE STOCK APPRECIATION RIGHTS PLAN OF HORIZON TO 12/31/86 FORM 10-K BANCORP 10.3 MATERIAL CONTRACTS-NONQUALIFIED STOCK OPTION INCORPORATED BY REFERENCE AND STOCK APPRECIATION RIGHTS AGREEMENT TO 12/31/86 FORM 10-K 10.4 MATERIAL CONTRACTS-AMENDED NONQUALIFIED INCORPORATED BY REFERENCE DIRECTORS DEFERRED COMPENSATION PLAN TO 12/31/89 FORM 10-K 10.5 MATERIAL CONTRACTS-SUPPLEMENTAL EMPLOYEE INCORPORATED BY REFERENCE RETIREMENT PLAN TO THE 12/31/96 FORM 10-K 11 STATEMENT REGARDING COMPUTATION OF PER SHARE INCORPORATED HEREIN IN EXHIBIT 13, EARNINGS-REFER TO ANNUAL REPORT PAGE 27 FOOTNOTE 1 13 REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS INCORPORATED HEREIN FOR THE YEAR ENDED DECEMBER 31, 1997 (NOT DEEMED FILED EXCEPT FOR PORTIONS THEREOF WHICH ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THIS FORM 10-K) 21 SUBSIDIARIES OF THE REGISTRANT INCORPORATED HEREIN
16 EX-13 2 EXHIBIT 13 1 Exhibit 13 - Annual Report to Shareholders for the year ended December 31, 1997 17 2 Management Discussion and Analysis of Results of Operations and Financial Condition ANALYSIS OF FINANCIAL CONDITION INVESTMENT SECURITIES - --------------------- Horizon maintains a high quality investment portfolio with very low credit risk. Investment securities totaled $60.085 million at December 31, 1997 and consisted of U.S. Treasury and Government Agency securities of $6.065 million (10%); Municipal securities of $9.407 million (16%); Equity securities of $4.015 million (7%); and Mortgage Backed securities of $40.598 million (67%). Total investment securities decreased 16.4% from 1996. 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 and Municipal securities. These funds were used primarily to repay maturing deposits during 1997. 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, 1997, the mortgage backed securities in the investment portfolio had an average life of 5.6 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 prepayment risk on these securities is nominal. 1 3 Mortgage backed securities are repriced when the underlying mortgages carry adjustable interest rates, some of which may have caps. Approximately 36% 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 1998, are as follows:
(IN THOUSANDS) Amount Yield ------- ----- First Quarter, 1998 $7,627 7.87% Second Quarter, 1998 0 0.00% Third Quarter, 1998 6,800 7.48% Fourth Quarter, 1998 0 0.00%
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, 1997, this portion of the investment portfolio have a book value of $9.407 million and of that amount, $6.248 million (67%) were rated AAA; $1.252 million (13%) were rated AA or A; and $1.907 million (20%) were not rated. Most of the not rated bonds were issued by local municipalities in Northwest Indiana. At December 31, 1997, 80.9% of investment securities were classified as available for sale compared to 82.2% at December 31, 1996. 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 $668 thousand, which resulted in a $400 thousand addition, net of tax, to stockholders' equity at December 31, 1997. This compared to a $85 thousand, net of tax, addition to stockholders' equity at December 31, 1996. Currently, Horizon does not maintain a trading account and is not using any derivative products for hedging or other purposes. 2 4 LOANS Total loans were $258.115 million at December 31, 1997, the principal earning asset of Bank . The current level of loans is a decrease of 4.9% from the December 31, 1996 level of $271.476 million. As the table below indicates, the decreases are primarily in 1-4 family real estate loans which decreased $13.154 million or 10.04%. This decrease was caused by the sale of mortgage loans during 1997.
(In thousands) $ % December 31 1997 1996 Change Change ----------- ---- ---- ------ ------ Real estate loans: 1-4 Family $117,917 $131,071 (13,154) -10.04% Multifamily 433 466 (33) -7.08% Other 1,995 2,202 (207) -9.40% ----- ----- ----- ------ Total 120,345 133,739 (13,394) -10.02% Commercial Loans: Working Capital and Equipment 57,188 59,359 (2,171) -3.66% Real Estate, including 5,002 5,698 (696) -12.21% Agriculture Tax Exempt 9,489 6,926 2,563 37.01% Other 1,498 3,477 (1,979) -56.92% ----- ----- ------- ------- Total 73,177 75,460 (2,283) -3.03% Consumer Loans: Auto 19,354 20,353 (999) -4.91% Recreation 1,697 1,434 263 18.34% Real Estate/ Home Improvement 21,828 19,929 1,899 9.53% Home Equity 3,941 4,041 (100) -2.47% Credit Cards 6,806 7,244 (438) -6.05% Unsecured 4,620 5,154 (534) -10.36% Other 6,347 4,122 2,225 53.98% ----- ----- ----- ------ Total 64,593 62,277 2,316 3.72% Grand Total $258,115 $271,476 (13,361) -4.92% ======== ======== ======== ======
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 engages an independent third-party loan review function that regularly reviews asset quality. 3 5 REAL ESTATE LOANS Real estate loans totaled $120.345 million or 47% of total loans as of December 31, 1997, compared to $133.739 million or 49% as of December 31, 1996. 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 $4.508 million and $2.657 million at December 31, 1997 and 1996, respectively. In addition to the customary real estate loans described above, Bank also had outstanding on December 31, 1997, $3.941 million in home equity lines of credit and $4.041 million at December 31, 1996. Credit lines normally limit the loan to collateral value to no more than 80%. These loans are classified as consumer loans in the table above and in Note 4 to the consolidated financial statements. Residential real estate lending is a highly competitive business. As of December 31, 1997, 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) |--------------------1997-------------------| |-----------------1996---------------| Percent of Percent of ---------- ---------- Amount Portfolio Yield Amount Portfolio Yield ------ --------- ----- ------ --------- ----- Fixed Rate Monthly Payment $47,007 39.06% 7.86% $53,508 40.01% 7.90% Bi-Weekly Payment 23,345 19.40% 7.82% 25,782 19.28% 7.84% Adjustable Rate Monthly Payment 49,409 41.05% 7.57% 53,807 40.23% 7.49% Bi-Weekly Payment 584 0.49% 8.36% 642 0.48% 8.18% --- ----- ----- --- ----- ----- Total $120,345 100.00% 7.76% $133,739 100.00% 7.74% ======== ======= ===== ======== ======= =====
In addition to the real estate loan portfolio, Bank sold real estate loans which it services. On December 31, 1997, the portfolio serviced consisted of 484 loans totaling $30.558 million. Total loans sold during 1997 totaled $17.039 million. COMMERCIAL LOANS Commercial loans totaled $73.177 million or 28% of total loans as of December 31, 1997, compared to $75.460 million or 28% as of December 31, 1996. 4 6 Commercial loans consisted of the following types of loans at December 31:
(In thousands) |--------------1997--------------| |-------------1996---------------| Percent of Percent of ---------- ---------- Number Amount Portfolio Number Amount Portfolio ------ ------ --------- ------ ------ --------- SBA Guaranteed Loans 34 $4,001 5.47% 43 $4,748 6.29% Municipal Government 61 11,553 15.79% 63 8,884 11.77% Lines of Credit 153 17,875 24.43% 149 16,192 21.46% Real Estate and Equipment Term Loans 303 39,748 54.31% 296 45,636 60.48% --- ------ ------ --- ------ ------ Total 551 $73,177 100.00% 551 $75,460 100.00% === ======= ======= === ======= =======
CONSUMER LOANS Consumer loans totaled $64.593 million or 25% of total loans as of December 31, 1997, compared to $62.277 million or 23% as of December 31, 1996. The total consumer loan portfolio increased 3.72% in 1997. ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses represents Bank's estimate of potential credit losses associated with the loan portfolio. The identification of loans that may have potential losses is necessarily subjective. Therefore, a general reserve is maintained to cover all potential losses within the entire loan portfolio. 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 guidance in determining the adequacy of the allowance for loan losses. At December 31, 1997, the allowance for loan losses was 1.05% of total loans outstanding, compared to .90% at December 31, 1996. During 1997, the provision for loan losses totaled $1.325 million compared to $66 thousand in 1996. This increase is primarily due to increased losses and delinquencies in the consumer loan and credit card portfolios. 5 7 NONPERFORMING LOANS Nonperforming loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning nonperforming loans to an earning asset basis. Nonperforming loans for the previous three years ending December 31 are as follows:
(In thousands) 1997 1996 1995 ---- ---- ---- Nonperforming Loans $ 1,181 $ 998 $1,201 ======= ===== ======
Nonperforming loans were .44 times the allowance for loan losses at December 31, 1997 compared to .41 and .43 times the allowance for loan losses on December 31, 1996 and 1995 respectively. A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 to 4 family residences, residential construction loans, automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans or portions thereof, are charged off when deemed uncollectible. Other real estate owned (OREO) and the related allowance for OREO losses for the previous three years ending December 31 is as follows:
(In thousands) 1997 1996 1995 ---- ---- ---- Other real estate owned $125 $500 $4,193 Allowance for OREO losses 0 151 1,075 - --- ----- Net other real estate owned $125 $349 $3,118 ==== ==== ======
6 8 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"). This property was sold to Indiana Blue Chip Hotel & Riverboat Casino Resort Corp. in November, 1996 and is being 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 $264.413 million at December 31, 1997 compared to $289.180 million at December 31, 1996 or a decrease of 8.56%. 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 --------------------------------------- --------------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Noninterest-bearing demand deposits $ 45,016 $ 33,680 $ 34,186 Interest-bearing demand deposits 37,256 53,851 51,802 1.62% 1.48% 1.47% Savings deposits 61,089 70,386 76,127 2.24 2.25 2.25 Time deposits 147,639 132,780 125,690 5.67 5.44 5.42 ------- ------- ------- Total deposits $ 291,000 $ 290,697 $ 287,805 ========= ========= =========
7 9 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 Employee Stock Ownership Plan 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 Employee Stock Ownership Plan 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 4, 1996, after obtaining approval from all required regulatory agencies, the ESOP borrowed $965,500 directly from Horizon and utilized the proceeds to purchased 23,550 shares from unrelated shareholders. In exchange, the ESOP issued a Term Note and Security Agreement to Horizon. As of December 31, 1997, 106,297 shares had been allocated to employees combined with 192,263 unallocated shares places a total of 298,560 shares in the ESOP. Dividends paid on 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 do not have ESOP's result in costs only and no return of capital is realized. Therefore, although the ESOP results in charges to expense like any retirement plan, the ESOP from a capital retention standpoint, 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. 8 10 As of December 31, 1997, the ESOP owned 33.62% 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 38.42%, excluding vested stock options, as of December 31, 1997. At December 31, 1997, the ESOP paid $250,154 to Horizon in order to release 8,203 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, 1997. Stockholders' equity totaled $32.757 million ($4.048 million from ESOP) as of December 31, 1997 compared to $33.508 million ($4.211 million from ESOP) as of December 31, 1996. At year end 1997, the ratio of stockholders' equity to assets was 9.11% compared to 8.77% for 1996. Horizon has selectively purchased shares that became available in the market from time to time. During 1997, management purchased 22,178 shares at a cost of $1.173 million compared to 8,778 shares at a cost of $368 thousand and 21,562 shares at a cost of $745 thousand for 1996 and 1995, respectively. Horizon paid dividends in the amount of $1.80 per share in 1997, $1.40 per share in 1996 and $1.20 per share in 1995. The dividend pay-out ratio (dividends as a percent of net income) was 73% during 1997 as compared to 27% and 29% in 1996 and 1995, respectively. The dividend pay-out ratio is high in 1997 because net income includes a provision for loan losses of $1.325 million and low 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 provision for loan losses, the OREO gain and tax refunds would be 41%, 37% and 50% in 1997, 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. For additional information regarding dividend conditions, see Note 1 of the Notes to the Consolidated Financial Statements. As of December 31, 1997, 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. 9 11 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 $311 million at December 31, 1997 compared to $351 million at December 31, 1996. This represents a 11.4% decrease from 1996. The book value of assets held in the IMS at December 31, 1997 by asset type are as follows:
(in thousands) Book Value Percentage ---------- ---------- Cash $746 0.24% Money Market Funds 82,992 26.69% Government and Agency Bonds 67,872 21.82% Municipal Bonds 20,502 6.59% Corporate Bonds 32,702 10.51% Common and Preferred Stock 81,975 26.36% Mutual Funds 24,221 7.79% ------ ----- Total $311,010 100.00% ======== =======
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 and market values of each of these types of accounts at December 31, 1997 are as follows:
(in thousands) Book Value Percentage Market Value Percentage ---------- ---------- ------------ ---------- Personal Agencies $92,110 29.61% $103,402 28.41% Estates and Guardianships 1,205 0.39% 875 0.24% Personal Trusts 69,845 22.46% 91,059 25.01% Employee Benefit 96,255 30.95% 116,622 32.04% Corporate Agency 51,587 16.59% 51,587 14.17% Other 8 0.00% 487 0.13% - ----- --- ----- Total $311,010 100.00% $364,032 100.00% ======== ======= ======== =======
10 12 Personal and Corporate Agencies total 46.20% of the book value of the accounts administered by the Trust Department at December 31, 1997. 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 22.46% 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 30.95% 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. RESULTS OF OPERATIONS NET INCOME Consolidated net income was $1.721 million or $2.42 per share for 1997 compared to $3.824 million or $5.19 per share and $3.039 million or $4.05 per share in 1996 and 1995, 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 $2.245 million or $3.16 per share for 1997, $4.409 million or $5.98 per share for 1996 and $3.631 million or $4.84 per share for 1995. 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. 11 13
--------------1997------------ --------------1996-------------- Average Yield/ Average Yield/ (In thousands) Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ASSETS Interest-earning assets Loans - total (1) (3) $269,348 $24,574 9.12% $256,580 $23,096 9.00% Taxable investment securities 55,963 3,968 7.09% 67,833 4,504 6.64% Nontaxable investment securities (2) 10,000 435 4.35% 10,138 455 4.49% Interest-bearing balances and 1,348 60 4.45% 968 46 4.75% money market investments (4) Bankers Acceptances Federal funds sold 4,170 228 5.47% 2,476 132 5.33% ----- --- ----- ----- --- ----- Total interest-earning assets 340,829 29,265 8.59% 337,995 28,233 8.35% ------- ------ ----- ------- ------ ----- Noninterest-earning assets Cash and due from banks 13,874 12,879 Allowance for loan losses (2,320) (2,655) Other assets 21,799 19,547 ------ ------ Total assets $374,182 $367,766 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Savings deposits 61,089 1,371 2.24% 70,386 1,587 2.25% Interest-bearing demand deposits 37,256 605 1.62% 53,851 798 1.48% Time deposits 147,639 8,367 5.67% 132,780 7,221 5.44% Short-term borrowings 1,911 110 5.76% 13,529 713 5.27% Long-term debt 43,493 2,484 5.71% 27,306 1,481 5.42% ------ ----- ----- ------ ----- ----- Total interest-earning liabilities 291,388 12,937 4.44% 297,852 11,800 3.96% ------- ------ ----- ------- ------ ----- Noninterest-bearing liabilities Demand deposits 45,016 33,680 Other liabilities 3,771 3,479 Stockholder's equity 34,007 32,755 ------ ------ Total liabilities and stockholders' equity $374,182 $367,766 ======== ======== Net interest income $16,328 $16,433 ======= ======= Net interest income as a percent of interest-earning assets 4.79% 4.86% ==== ==== ---------------1995------------- Average Yield/ (In thousands) Balance Interest Rate ------- -------- ---- ASSETS Interest-earning assets Loans - total (1) (3) $226,198 $20,228 8.94% Taxable investment securities 82,348 5,422 6.58% Nontaxable investment securities (2) 12,233 519 4.24% Interest-bearing balances and 1,044 60 5.75% money market investments (4) Bankers Acceptances 0 Federal funds sold 592 33 5.57% --- -- ----- Total interest-earning assets 322,415 26,262 8.15% ------- ------ ----- Noninterest-earning assets Cash and due from banks 13,310 Allowance for loan losses (2,716) Other assets 20,303 ------ Total assets $353,312 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Savings deposits 76,127 1,712 2.25% Interest-bearing demand deposits 51,802 760 1.47% Time deposits 125,690 6,811 5.42% Short-term borrowings 15,948 939 5.89% Long-term debt 16,726 890 5.32% ------ --- ----- Total interest-earning liabilities 286,293 11,112 3.88% ------- ------ ----- Noninterest-bearing liabilities Demand deposits 34,186 Other liabilities 2,719 Stockholder's equity 30,114 ------ Total liabilities and stockholders' equity $353,312 ======== Net interest income $15,150 ======= Net interest income as a percent of interest-earning assets 4.70% ==== (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 $1,248,250, $1,122,390 and $1,056,404 in 1997, 1996 and 1995, 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 a December 31, 1997.
14
1997- 1996 1996 - 1995 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 $1,478 $1,162 $316 $2,868 $2,734 $134 Taxable investment securities (536) (827) 291 (918) (963) 45 Nontaxable investment securities (20) (6) (14) (64) (93) 29 Interest bearing balances & money 14 17 (3) (14) (4) (10) market investments Federal Funds Sold 96 93 3 99 101 (2) -- -- - --- --- Total interest income $1,032 $439 $593 $1,971 $1,775 $196 ------ ---- ---- ------ ------ ---- INTEREST EXPENSE ---------------- Savings deposits $(216) $(209) $(7) $(125) $(129) $4 Interest bearing demand deposits (193) (264) 71 38 30 8 Time deposits 1,146 833 313 410 385 25 Short-term borrowings (603) (663) 60 (226) (134) (92) Long-term debt 1,003 921 82 591 574 17 ----- --- -- --- -- Total interest expense 1,137 618 519 688 726 (38) ----- --- --- --- --- ---- NET INTEREST EARNINGS $(105) $(179) $74 $1,283 $1,049 $234 ====== ====== === ====== ====== ====
15 Horizon's average earning assets were $340.829 million in 1997 compared to $337.995 million in 1996 and $322.415 million in 1995. The net interest margin for 1997 was 4.79% compared to 4.86% and 4.70% in 1996 and 1995, respectively. The decrease in net interest margin from 1996 to 1997 was due to the increase in rate and volume of time deposits and long term debt outpacing the increase in rate and volume of loans. 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. 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 $2.020 million, $1.573 million and $1.441 million for 1997, 1996 and 1995, respectively. Net security gains were $9 for 1997 compared to $0 and $46 thousand for 1996 and 1995, respectively. Fiduciary fees were $2.423 million in 1997 compared to $2.094 million and $1.769 million in 1996 and 1995, respectively. NONINTEREST EXPENSE Noninterest expense totaled $17.689 million in 1997 compared to $16.694 million and $15.931 million in 1996 and 1995, respectively. The increase in 1997 was a result of increased occupancy, data processing and equipment, supplies and advertising expenses offset by a decrease in salaries and benefits. The majority of these expenses were incurred relative to the change of the Bank's name, investments in technology, the expansion of sales offices in Porter County and the new South Franklin building. The increase 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. Salaries and benefits decreased 4.09% during 1997 compared to an increase of 3.67% for 1996 and an increase of 13.72% for 1995. The 1997 decrease was primarily the result of reduced expenses related to the ESOP and Stock Option Plans. 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. 14 16 Data processing and equipment expense increased 18.79% in 1997, 22.56% in 1996, 4.4% in 1995. The 1997 and 1996 increases are due to investments in technology that caused an increase in depreciation expense and an increase in support and maintenance expense. Total other expenses increased 11.39%, 4.89% and 9.44% in 1997, 1996 and 1995, respectively. The primary factors contributing to the 1997 increase in other expense were: 1) $273 increase in advertising expense, primarily related to the change of the Bank's name, 2) $195 thousand increase in supplies and printing expenses and 3) $154 thousand increase in outside services and consultants. The primary factors contributing to the 1996 increase in other expense were: 1) $70 thousand increase in supplies and printing expenses, 2) $75 increase in advertising expenses, 3) $199 thousand increase in corporate expense, 4) $170 thousand increase in losses, including frauds and forgeries and 5) $332 thousand decrease in deposit insurance expense. INCOME TAXES The income tax provision totaled $584 thousand in 1997 compared to $1.599 million and $167 thousand in 1996 and 1995, respectively. The effective tax rate was 25.34%, 29.49% and 5.21% for 1997, 1996, and 1995, 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 1997, cash flows were generated from earnings of $1.7 million, a 15 17 $11.8 million decrease in investment securities, a $17.0 million sale of loans and a $3.2 million increase in short term borrowings. Cash flows were used for an $4.8 million increase in loan demand, a $3.7 million purchase of premises and equipment and a $24.8 million decrease in deposits. The net cash position increased $18 thousand, primarily in cash and due from banks and Federal funds sold. INTEREST SENSITIVITY The degree by which net interest income may fluctuate due to changes in interest rates is monitored by Horizon using computer simulation modeling, incorporating not only the current GAP position but the effect of expected repricing of specific financial assets and liabilities. When repricing opportunities are not properly aligned, net interest income may be affected when interest rates change. Forecasting results of the possible outcomes determine the exposure 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, 1997, Horizon had a negative GAP position of 1:.96 This indicates that the total amount of assets repricing within one year were 96% of the total amount of liabilities repricing within the same time period. This compares to a negative GAP position of 1:.82 at December 31, 1996.
Rate Sensitivity Greater than Greater than 3 months 6 months and and 3 months less than less than Greater (in thousands) or less 6 months 1 year than 1 year Total ------- ---------- -------- ----------- ----- Loans $55,671 $19,920 $37,084 $144,857 $257,532 Money Market Investments 852 852 Interest bearing balances with Banks 219 219 Investment securities and investment 15,198 4,858 11,955 28,074 60,085 securities available for sale Other assets 41,063 41,063 -------------------------------------------------------------------- Total assets $71,721 $24,778 $49,039 $214,213 $359,751 ==================================================================== Non-interest bearing deposits $61,474 $61,474 Interest bearing deposits $47,427 $25,951 $18,007 111,554 202,939 Borrowed funds 36,000 11,000 11,000 58,000 Other liabilities 4,581 4,581 Stockholders equity 32,757 32,757 -------------------------------------------------------------------- Total liabilities and stockholders equity $ 83,427 $ 36,951 $29,007 $210,366 $359,751 ==================================================================== GAP $(11,706) $(12,173) $20,032 $3,847 Cumulative GAP (11,706) (23,879) (3,847) 0
16 18 Included in the gap analysis are certain interest-bearing demand accounts and savings accounts. These interest-bearing accounts are subject to immediate withdrawal. However, Horizon considers approximately 70% of these deposits to be insensitive to gradual changes in interest rates and generally to behave like deposits with longer maturities based upon historical experience. Accordingly, Horizon has considered the balances of interest-bearing demand and savings account deposits which totaled $49.795 million at December 31, 1997 to be non-rate sensitive. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Horizon's primary market risk exposure is interest rate risk. Interest rate risk (IRR) is the risk that Horizon's earnings and capital will be adversely affected by changes in interest rates. The primary approach to IRR management is one which focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR. Horizon's exposure to interest rate risk is due to repricing or mismatch risk, basis risk, embedded options risk and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arise because of differences in the timing of when those interest rate changes affect Horizon's assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon's objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position including the sale of mortgage loans on the secondary market, varying maturities of FHLB advances, certificates of deposit funding and investment securities. The table which follows provides information about Horizon's financial instruments that are sensitive to changes in interest rates as of December 31, 1997. Horizon had no derivative financial instruments or trading portfolio as of December 31, 1997. The table incorporates Horizon's internal system generated data related to the maturity and repayment/withdrawal of interest earning assets and interest bearing liabilities. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage backed securities. From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments. For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon's experience and management's judgment concerning the most likely withdrawal behaviors. 17 19
Quantitative Disclosures of Market Risk - --------------------------------------- 2003 and Fair Value 1998 1999 2000 2001 2002 beyond Total 12/31/97 ---- ---- ---- ---- ---- ------ ----- -------- Rate-sensitive assets: Fixed interest rate loans $54,203 $33,492 $21,855 $17,044 $11,291 $23,895 $161,780 $160,781 Average interest rate 9.23% 9.07% 8.46% 8.31% 8.16% 8.26% 8.78% Variable interest rate loans 24,062 5,016 4,662 3,495 3,671 57,548 98,454 98,186 Average interest rate 10.11% 8.21% 7.80% 7.48% 7.24% 7.84% 8.38% Total loans 78,265 38,508 26,517 20,539 14,962 81,443 260,234 258,967 Average interest rate 9.50% 8.95% 8.34% 8.17% 7.94% 7.97% 7.13% Securities 20,078 10,765 7,426 6,121 3,796 11,899 60,085 $60,394 Average interest rate 7.14% 6.72% 6.63% 6.70% 6.65% 5.59% 6.62% Other interest bearing assets 852 219 1,071 1,071 Average interest rate 5.50% 5.50% 5.50% Total Earning Assets $99,195 $49,273 $33,943 $26,660 $18,758 $93,561 $321,390 $320,432 Average interest rate 8.99% 8.47% 7.97% 7.83% 7.68% 7.66% 6.75%
18 20 Quantitative Disclosures of Market Risk (continued) - ---------------------------------------------------
2003 and Fair Value 1998 1999 2000 2001 2002 beyond Total 12/31/97 ---- ---- ---- ---- ---- ------ ----- -------- Rate-sensitive liabilities: --------------------------- Non-interest bearing deposits $615 $307 $154 $60,398 $61,474 $61,474 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% NOW accounts 166 83 42 16,314 16,605 16,605 Average interest rate 1.47% 1.47% 1.47% 1.47% 1.47% Savings and Money Market accounts 545 273 136 53,578 54,532 54,532 Average interest rate 2.25% 2.25% 2.25% 2.25% 2.25% Certificates of Deposit 70,044 42,583 16,792 2,383 131,802 136,850 Average interest rate 5.66% 5.79% 5.69% 5.49% 5.70% Total Deposits 71,370 43,246 17,124 2,383 130,290 264,413 269,461 Average interest rate 5.55% 5.70% 5.58% 5.49% 0.79% 2.82% Fixed interest rate borrowings 57,000 57,000 57,060 Average interest rate 5.76% 5.76% Variable interest rate borrowings 1,000 1,000 1,005 Average interest rate 7.71% 7.71% Total Funds $129,370 $43,246 $17,124 $2,383 $130,290 $322,413 $327,526 Average interest rate 5.66% 5.70% 5.58% 5.49% 0.79% 3.36%
19 21 PENDING ACQUISITION - ------------------- On October 1, 1997, Horizon's wholly owned subsidiary, Horizon Bank, N.A. entered into an Agreement, whereby the Bank will acquire all the assets and liabilities of Phoenix Insurance Services, Inc. The acquisition is contingent upon Bank receiving insurance licenses from the states of Indiana, Illinois and Michigan. This transaction is expected to be consummated during the second quarter of 1998. YEAR 2000 - --------- During 1997, Horizon initiated a review of all hardware and software utilized to confirm that all will function properly in the Year 2000. Currently, all vendors who have responded indicate that their hardware or software is or will be Year 2000 compliant by the end of 1998. NEW ACCOUNTING STANDARDS - ------------------------ In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management is currently considering the impact of SFAS 130, but does not believe it will have a material effect on the Company's consolidated financial statements. In June 1997, FASB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for public companies to report certain financial information about operating segments. This statement also requires public companies to report certain information about their products and services and the geographic areas in which they operate. SFAS is effective for financial statements for fiscal years beginning after December 15, 1997. At this time, management is evaluating the statement and has not determined if the new reporting provisions will require supplemental disclosures by the Company. 20 22
December 31 CONSOLIDATED BALANCE SHEET (THOUSANDS) 1997 1996 ---- ---- ASSETS Cash and cash equivalents Cash and due from banks $19,506 $19,551 Money market investment 852 789 ------------- ------------- Total cash and cash equivalents 20,358 20,340 Short-term investments-Interest-bearing balances in banks 219 211 Investment securities available for sale, net 48,638 59,041 Investment securities held to maturity (market value $11,756 - 1997, $12,838 - 1996) 11,447 12,810 Loans held for sale, at cost which approximates market value 2,119 1,034 Total loans held to maturity 258,115 271,476 Allowance for loan losses (2,702) (2,435) ------------- ------------- Net loans held to maturity 255,413 269,041 Premises and equipment, net 16,144 14,053 Accrued interest receivable 2,264 2,216 Other assets 3,149 3,292 ------------- ------------- Total assets $359,751 $382,038 ============= ============= LIABILITIES Deposits Noninterest-bearing $61,474 $46,050 Interest-bearing 202,939 243,130 ------------- ------------- Total deposits 264,413 289,180 Short-term borrowings 16,000 12,849 Federal Home Loan Bank Advances 42,000 41,500 Accrued interest payable 674 590 Other liabilities 3,907 4,411 ------------- ------------- Total liabilities 326,994 348,530 ------------- ------------- Equity received from contributions and dividends to the ESOP 4,048 4,211 STOCKHOLDERS' EQUITY Common stock: $1 stated value, 5,000,000 shares authorized and 1,034,428 shares issued, less ESOP shares of 307,538 and 319,664 at 720 708 December 31, 1997 and 1996. Additional paid-in capital 7,763 7,962 Retained earnings 24,355 23,898 Unrealized gain/loss on securities available for sale (net of tax) 400 85 Less treasury stock, at cost - 146,263 shares - 1997, 124,085 shares - 1996 (4,529) (3,356) ------------- ------------- Total stockholders' equity 28,709 29,297 ------------- ------------- Total liabilities and stockholder's equity $359,751 $382,038 ============= =============
The accompanying notes are an integral part of these financial statements 21 23 CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS)
1997 1996 1995 ---- ---- ---- INTEREST INCOME Interest and fees on loans $24,574 $23,096 $20,228 Interest and dividends on investments Taxable 4,256 4,682 5,515 Nontaxable 435 455 519 ----------- ------------ ----------- Total interest income 29,265 28,233 26,262 ----------- ------------ ----------- INTEREST EXPENSE Interest on deposits 10,343 9,605 9,284 Interest on Federal funds purchased and securities sold under agreements to repurchase 110 714 938 Interest on Federal Home Loan Bank advances 2,484 1,481 890 ----------- ------------ ----------- Total interest expense 12,937 11,800 11,112 ----------- ------------ ----------- NET INTEREST INCOME 16,328 16,433 15,150 PROVISION FOR LOAN LOSSES 1,325 66 ----------- ------------ ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,003 16,367 15,150 ----------- ------------ ----------- NONINTEREST INCOME Service charges on deposits 2,020 1,573 1,441 Fiduciary income 2,423 2,094 1,769 Gain on sale of other real estate owned 9 1,609 45 Income from Insurance Company 293 221 159 Other Income 246 253 573 ----------- ------------ ----------- Total noninterest income 4,991 5,750 3,987 ----------- ------------ ----------- NONINTEREST EXPENSE Salaries and employee benefits 8,316 8,671 8,364 Occupancy expense of Company premises, net of rental income 1,346 1,164 1,017 Data processing and equipment expenses 2,504 2,108 1,720 Loss on disposal of fixed assets 274 Loss on other real estate owned 18 55 353 Other expenses 5,231 4,696 4,477 ----------- ------------ ----------- Total noninterest expense 17,689 16,694 15,931 ----------- ------------ ----------- INCOME BEFORE INCOME TAXES 2,305 5,423 3,206 PROVISION FOR INCOME TAXES 584 1,599 167 ----------- ------------ ----------- NET INCOME $1,721 $3,824 $3,039 =========== ============ =========== Basic Earnings per common share $2.42 $5.19 $4.05
The accompanying notes are an integral part of these financial statements 22 24
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Thousands, except per share data) Unrealized Gain/loss on Additional Securities Total Common Paid-In Retained Available for Treasury Stockholders' Stock Capital Earnings Sale Stock Equity ----------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1995 $732 $9,238 $18,961 $(2,327) $(2,243) $24,361 ----------------------------------------------------------------------------------------------------------------------------- Net Income 3,039 3,039 Cash Dividends ($1.20 per share) (895) (895) Purchase of 21,562 shares of treasury stock (745) (745) Change in unrealized gain/(loss) on 2,793 2,793 marketable equity securities ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $732 $9,238 $21,105 $466 $(2,988) $28,553 ----------------------------------------------------------------------------------------------------------------------------- Net Income 3,824 3,824 Cash Dividends ($1.40 per share) (1,031) (1,031) Purchase of 8,778 shares of treasury stock (368) (368) Net purchases and distributions with ESOP (24) (1,339) (1,363) Tax benefit of ESOP dividend deduction 63 63 Change in unrealized gain/(loss) on (381) (381) marketable equity securities ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $708 $7,962 $23,898 $85 $(3,356) $29,297 ----------------------------------------------------------------------------------------------------------------------------- Net Income 1,721 1,721 Cash Dividends ($1.80 per share) (1,264) (1,264) Purchase of 22,178 shares of treasury stock (1,173) (1,173) Net purchases and distributions with ESOP 12 (270) (258) Tax benefit of ESOP dividend deduction 71 71 Change in unrealized gain/(loss) on 315 315 marketable equity securities ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $720 $7,763 $24,355 $400 $(4,529) $28,709 -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements 23 25
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS) 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Adjustments to reconcile net income to net cash from operating activities: Net income $1,721 $3,824 $3,039 Depreciation 1,370 1,040 892 Net (accretion)/amortization 158 312 179 Additional paid in capital from release of ESOP shares 184 244 172 Provision for loan losses 1,325 66 Gains on sales of loans (56) Security gains (9) (46) (Gain)/loss on disposal of fixed assets 274 (2) 24 Gain on sale of other real estate owned (9) (1,609) (45) Loss on other real estate owned 18 55 353 Benefit of deferred taxes 29 357 117 Change in deferred loan fees (57) (52) (26) Change in unearned income 54 51 (262) Change in interest receivable (48) 684 (93) Change in interest payable 84 23 101 Change in other assets (634) 2,825 697 Change in other liabilities (504) 1,289 452 ------------- ------------- ------------- Net cash provided by operating activities 3,900 9,107 5,554 -------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale 1,009 15,607 Proceeds from maturities, calls and principal repayments of investment securities-available for sale 11,662 17,969 16,923 Proceeds from maturities, calls and principal repayments of investment securities-held to maturity 3,315 5,555 5,926 Purchase of investment securities-available for sale (1,887) (2,993) (19,757) Purchase of investment securities-held to maturity (1,962) (6,217) (2,622) Change in short-term investments (8) (5) (106) Change in loans (4,766) (37,452) (17,138) Purchase of loans (1,379) (344) (1,260) Proceeds from sales of loans 17,039 6,392 353 Recoveries on loans previously charged-off 383 149 515 Premises and equipment expenditures (3,735) (4,064) (1,667) -------------- ------------- ------------ Net cash provided by (used in) investing activities 19,671 (21,010) (3,226) -------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase/(decrease) in deposits (24,767) 196 (6,800) Dividends paid (1,264) (1,031) (895) Change in short-term borrowings 3,151 (8,720) (3,124) Purchase of treasury stock (1,173) (368) (745) Change in Federal Home Loan Bank advance 500 20,100 3,000 ------------- ------------ -------------- Net cash provided by (used in) financing activities (23,553) 10,177 (8,564) -------------- ------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 18 (1,726) (6,236) -------------- ------------- ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,340 22,066 28,134 -------------- ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,358 $20,340 $21,898 ============== ============= ============ CASH PAID DURING THE YEAR FOR: Interest $10,427 $11,823 $11,011 Income taxes 661 1,714 (202)
24 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. 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 insurance. The net income generated from the insurance operation are not significant to the overall operations of Horizon. The Loan Store, Inc. is engaged in the business of retail lending and operates facilities in Merrillville, Highland, South Bend and Michigan City, 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 IN PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. 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 are 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, 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. 25 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- CONCENTRATIONS OF CREDIT RISK - Bank grants commercial, real estate and consumer 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 loans make up approximately 47% of the loan portfolio and are secured by both commercial and residential real estate. Installment loans make up approximately 25% 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. 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. 26 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- 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 $125,000 and $349,000 at December 31, 1997 and 1996, respectively. SERVICING RIGHTS - Prior to adopting Financial Accounting Standard No. 122 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. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Excess servicing receivable is reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method. INCOME TAXES - Horizon files annual consolidated income tax returns. Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes " 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. TRUST ASSETS AND INCOME - Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon. Income from trust 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 - Effective December 15, 1997, Horizon adopted Statement of Financial Accounting Standard (SFAS) 128, "Earnings Per Share." SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS with earnings per common share (basic EPS). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. SFAS 128 also requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Horizon has no potential dilute instruments. The number of shares used in the computation of basic earnings per share is 710,967 for 1997, 736,887 for 1996, and 750,286 for 1995. 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, 1997 approximately $2,479,000 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 STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and Federal funds sold with maturities of 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 1996 and 1995 financial statements to be comparable to 1997. 27 29 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, 1997 and 1996. 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. 28 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) - ------------------------------------------------------------------------------ SHORT-TERM BORROWINGS AND OBLIGATION TO ESOP - 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, 1997 and 1996 are as follows:
(Thousands) 1997 1997 1996 1996 Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets: Cash and cash equivalents $ 20,358 $ 20,358 $ 20,340 $ 20,340 Short-term investments 219 219 211 211 Investment securities 60,085 60,394 71,851 71,871 Net loans 257,532 256,278 270,075 258,035 Interest receivable 2,264 2,264 2,216 2,216 Financial Liabilities: Deposits: Noninterest-bearing $ 61,474 $ 61,474 $ 46,050 $ 46,050 Interest-bearing 202,939 207,986 243,130 246,960 ---------- -------- ---------- ---------- Total deposits 264,413 269,460 289,180 293,010 Short-term borrowings 16,000 16,005 12,849 12,824 Federal Home Loan Bank advances 42,000 42,060 41,500 41,503 Interest payable 674 674 590 590
29 31 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:
Gross Gross Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value ---- ----- ------ ----- AVAILABLE FOR SALE AT DECEMBER 31, 1997 U.S. Treasury and U.S. Government agency securities $3,965 $60 $ 0 $4,025 GNMA 6,048 140 6,188 FHLMC 13,126 244 13,370 FNMA 20,811 229 21,040 -------------- --------------- -------------- ------------ Total mortgage-backed securities 39,985 613 0 40,598 -------------- --------------- -------------- ------------ Total debt securities 43,950 673 0 44,623 Equity securities 4,020 (5) 4,015 -------------- --------------- -------------- ------------ Total investment securities available for sale $47,970 $673 $(5) $48,638 ============== =============== ============== ============ HELD TO MATURITY AT DECEMBER 31, 1997 U.S. Government agency securities $2,040 $104 $ 0 $2,144 Obligations of state and political subdivisions 9,407 205 9,612 -------------- --------------- -------------- ------------ Total debt securities held to maturity $11,447 $309 $0 $11,756 ============== =============== ============== ============ AVAILABLE FOR SALE AT DECEMBER 31, 1996 U.S. Treasury and U.S. Government agency securities $4,965 $103 $ 0 $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, 1996 U.S. Government agency securities $2,793 $ 0 $ 0 $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 ============== =============== ============== ============
30 32 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, 1997, 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 after one year through five years $ 1,715 $ 1,757 Due after five years through ten years 250 250 Due after ten years 2,000 2,018 --------- --------- Subtotal 3,965 4,025 Mortgage-backed securities 39,985 40,598 --------- --------- Total debt securities available for sale $ 43,950 $ 44,623 ========= ========= HELD TO MATURITY: Due in one year or less $ 1,291 $ 1,312 Due after one year through five years 2,603 2,636 Due after five years through ten years 5,611 5,825 Due after ten years 1,942 1,983 --------- --------- Total debt securities held to maturity $ 11,447 $ 11,756 ========= =========
Gross gains and losses realized on sales of investment securities available for sale were $9,000 and $0 for 1997, $0 for 1996 and $62,000 and $16,000 for 1995. At December 31, 1997 and 1996, 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 $16,806,000 and $19,836,000 as of December 31, 1997 and 1996, respectively, were pledged to secure public and trust deposits and Federal Home Loan Bank advances. NOTE 4 - LOANS - -------------- Loans as presented in the consolidated balance sheets are comprised of the following classifications:
(Thousands) 1997 1996 ---- ---- Commercial loans $73,177 $75,460 Real estate mortgages 120,345 133,739 Installment loans 64,593 62,277 ------ ------ Total loans $258,115 $271,476 ======== ========
Loans to directors and executive officers of Horizon and Bank, including associates of such persons, amounted to $3,538,000 and $4,188,000, as of December 31, 1997 and 1996, respectively. During 1997 new loans or advances were $1,232,000 and loan payments were $1,885,000. 31 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - ALLOWANCE FOR LOAN LOSSES - ----------------------------------
(thousands) 1997 1996 1995 ---- ---- ---- Balance at beginning of year $2,435 $2,777 $2,555 Provision charged to expense 1,325 66 Recoveries credited to the allowance 383 149 515 Losses charged to the allowance (1,441) (557) (293) ------- ----- ----- Balance at end of year $2,702 $2,435 $2,777 ====== ====== ======
At December 31, 1997 and 1996, loans past due more than 90 days and still accruing interest approximated $862,000 and $682,000, respectively. Loans on which the recognition of interest has been discontinued or reduced totaled $319,000, $316,000 and $668,000 at December 31, 1997, 1996 and 1995, respectively. Interest income not recognized on these loans totaled approximately $32,000, $36,000, and $55,000 in 1997, 1996 and 1995, respectively. 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) 1997 1996 1995 ---- ---- ---- Balance at beginning of $151 $1,075 $1,801 Loss on other real estate owned charged to expense 48 Sale of other real estate owned (151) (924) Losses charged to the allowance (774) ----- ----- ------ Balance at end of year $0 $151 $1,075 ===== ====== ======
NOTE 7 - PREMISES AND EQUIPMENT-NET - ----------------------------------- Premises and equipment are stated at cost, less accumulated depreciation and consist of the following as of December 31:
(Thousands) 1997 1996 ---- ---- Land $2,838 $2,504 Building and improvements 12,689 12,757 Furniture and equipment 8,878 6,288 ----- ----- Total 24,405 21,549 Accumulated depreciation (8,261) (7,496) ------- ------- Premises and equipment, net $16,144 $14,053 ======= =======
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $1,370,000, $1,040,000 and $892,000, respectively. 32 34 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, 1997, 1996 and 1995 amounted to $291,000, $317,000 and $197,000, respectively. The future minimum commitments as of December 31, 1997, for all noncancelable operating leases, follows:
Year ending December 31 (thousands) ----------- ----------- 1998 $229 1999 191 2000 108 2001 38 2002 1 ---- Total $567 ====
NOTE 9 - DEPOSITS - ----------------- The components of the deposit categories are as follows at December 31:
(Thousands) 1997 1996 ---- ---- DEMAND Noninterest-bearing $61,474 $46,050 Interest-bearing (NOW) 16,605 48,172 ------ ------ Total demand deposits 78,079 94,222 SAVINGS Fixed rate 48,714 55,843 Money market (variable rate) 5,817 8,876 ----- ----- Total savings deposits 54,531 64,719 TIME Certificates of deposit of $100,000 or more 19,558 28,158 Other time deposits 112,245 102,081 ------- ------- Total time deposits 131,803 130,239 ------- ------- Total deposits $264,413 $289,180 ======== ========
Interest expense on time certificates of $100,000 or more was approximately $2,591,000, $2,001,000 and $1,713,000 for 1997, 1996 and 1995, respectively. 33 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - DEPOSITS (Continued) - ----------------- Certificates of deposit of $100,000 or more by remaining maturity as of December 31 are as follows:
(Thousands) 1997 1996 ---- ---- Due in three months or less $6,652 $14,311 Due after three months through six months 2,943 5,059 Due after six months through one year 2,429 3,261 Due after one year 7,534 5,527 ----- ----- Total certificates of deposit of $100,000 or more $19,558 $28,158 ======= =======
NOTE 10 - BORROWED FUNDS - ------------------------ Included in short-term borrowings were $1,000,000 of financing to Loan Store from an unrelated financial institution and $15,000,000 of Federal Funds purchased at December 31, 1997. At December 31, 1996, short-term borrowings included $11,562,000 of securities sold under agreements to repurchase and $1,200,000 of Federal Funds purchased. These short-term borrowings mature within one year. In addition to these borrowings, at December 31, 1997 Bank has available approximately $27,500,000 in credit lines with various money center banks. Federal Home Loan Bank Advances at December 31, 1997 by contractual maturity are as follows: (Thousands) FHLB Advance, 5.74%, Due May 7, 1998 $5,000 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, 5.63%, Due January 19, 1999 6,000 FHLB Advance, variable, Due October 12, 1999 10,000 FHLB Advance, variable, Due January 3, 2000 10,000 ------- $42,000 =======
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are secured by all stock in the FHLB and all mortgage related assets. NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN - --------------------------------------------------------- Horizon maintains an employee stock ownership plan (ESOP) as a retirement plan 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. 34 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN (Continued) - --------------------------------------------------------- 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 the Company's stock into the Employee Stock Ownership Plan 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 committed-to-be-released for allocation to employee retirement accounts. 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 1997, 1996 and 1995:
(in thousands) 1997 1996 1995 ---- ---- ---- Dividends paid on unallocated ESOP shares $340 $255 $207 Market value increase of shares released 184 244 172 Other contributions 86 213 ---- ---- ---- Total ESOP expense included in salaries and benefits $524 $585 $592 ==== ==== ==== Total cash contributions made to ESOP during the year $0 $86 $207 == === ====
As of December 31, 1997, Horizon had seven loans outstanding with the ESOP with remaining balances totaling $6,420,000. These loans were utilized to repurchase Horizon common shares from retiring employees, eligible employees electing to diversify portions of their ESOP accounts and other shareholders. Collateral for these loans is 217,175 shares of Horizon common stock. These loans do not bear any interest and mature within 15 to 20 years. 35 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN (Continued) - --------------------------------------------------------- Below are the transactions affecting the ESOP equity accounts:
Common Additional Unallocated Obligation (in thousands) 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 Market value increase in ESOP shares released 172 172 Loan repayments 500 500 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 ------------------------------------------------------------------------------------------------------------------------------ Market value increase in ESOP shares released 244 244 Loan repayments 513 513 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 ------------------------------------------------------------------------------------------------------------------------------- Market value increase in ESOP shares released 184 184 Loan repayments 250 250 Net ESOP share purchases and distributions (12) 270 258 Loans to fund ESOP share repurchases (855) (855) ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $307 $10,161 $(6,420) $0 $4,048 -------------------------------------------------------------------------------------------------------------------------------
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 1997, 1996 and 1995 expense and contributions related to the thrift plan totaled $189,000, $203,000 and $172,000, respectively. 36 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 - OTHER EXPENSES - ------------------------ The following is an analysis of other expenses for the year ended December 31:
(in thousands) 1997 1996 1995 ---- ---- ---- Supplies and printing $504 $309 $379 Advertising 762 489 414 Communication 606 492 444 Professional fees 508 516 486 Deposit insurance 95 8 340 Training 278 251 320 Outside services and consultants 796 642 625 Insurance Company 201 226 176 Other 1,481 1,763 1,293 ----- ----- ----- Total other expenses $5,231 $4,696 $4,477 ====== ====== ======
NOTE 14 - INCOME TAXES - ---------------------- The provision for income taxes consists of the following for the years ended December 31:
(in thousands) 1997 1996 1995 ---- ---- ---- Current tax expense Federal $402 $886 $716 State 211 356 288 Income tax refunds (954) ----- ------ ---- Total 613 1,242 50 Deferred tax provision/(benefit) (29) 357 117 ---- ------ ---- Total provision for income taxes $584 $1,599 $167
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. 37 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - INCOME TAXES (Continued) - ---------------------- Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities at December 31, 1997 and 1996, were as follows:
(in thousands) 1997 1996 ---- ---- Gross deferred tax assets: Allowance for losses on loans and other real estate $140 $68 Accrued operating expenses 91 100 Deferred loan fees 139 163 Other 558 561 --- --- Total deferred tax assets 928 892 Gross deferred tax liabilities: Depreciation (61) (55) Discount accretion (4) (3) --- --- Total deferred tax liabilities (65) (58) Net deferred tax assets $863 $834 ==== ====
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:
(in thousands) 1997 1996 1995 ---- ---- ---- Income tax at the statutory Federal income tax rate $784 $1,843 $1,090 Add/(subtract) tax effect of: Tax-exempt income (271) (300) (334) Nondeductible expenses and other (110) (285) 175 Federal and state tax refunds (954) State tax, net of federal effect 181 341 190 --- --- --- Total provision for income taxes $584 $1,599 $167 ==== ====== ====
Not included in the above tables, but directly impacting changes in stockholders' equity was the effects of unrealized gains/(losses) on securities of $268,000 and $60,000 in 1997 and 1996. 38 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 capitalized, 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. 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%
At year end, consolidated actual capital levels (in millions) and minimum required levels were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ 1997 Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total capital (to risk weighted assets) Consolidated $ 35.0 12.5% $ 22.3 8.0% $ 27.9 10.0% Bank $ 33.0 14.2% $ 18.6 8.0% $ 23.2 10.0% Tier 1 capital (to risk weighted assets) Consolidated $ 32.3 11.6% $ 11.2 4.0% $ 16.7 6.0% Bank $ 30.3 13.1% $ 9.3 4.0% $ 13.9 6.0% Tier 1 capital (to average assets) Consolidated $ 32.3 8.8% $ 14.7 4.0% $ 18.4 5.0% Bank $ 30.3 8.3% $ 14.5 4.0% $ 18.2 5.0% 1996 Total capital (to risk weighted assets) Consolidated $ 35.8 13.6% $ 22.4 8.0% $ 28.0 10.0% Bank $ 32.7 13.5% $ 19.4 8.0% $ 24.3 10.0% Tier 1 capital (to risk weighted assets) Consolidated $ 33.3 12.7% $ 11.2 4.0% $ 16.8 6.0% Bank $ 30.3 12.5% $ 9.7 4.0% $ 14.6 6.0% Tier 1 capital (to average assets) Consolidated $ 33.3 8.2% $ 16.3 4.0% $ 20.4 5.0% Bank $ 30.3 8.2% $ 14.6 4.0% $ 18.6 5.0%
39 41 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 as of and for the years ended December 31:
CONDENSED BALANCE SHEETS (Thousands) - ------------------------- 1997 1996 ---- ---- ASSETS Total cash and cash equivalents $864 $712 Investment in Bank 30,716 30,473 Investment in Insurance Company 226 172 Investment in The Loan Store 657 433 Investment securities, net 401 1,404 Accrued interest receivable 0 20 Dividends receivable from Bank 500 1,000 Other assets 1,843 1,902 ----- ----- Total assets $35,207 $36,116 ======= ======= LIABILITIES Other liabilities $2,450 $2,608 ------ ------ Total liabilities 2,450 2,608 Equity receivable from contributions and dividends to ESOP 4,048 4,211 STOCKHOLDER'S EQUITY 28,709 29,297 ------ ------ Total liabilities and stockholder's equity $35,207 $36,116 ======= ======= CONDENSED STATEMENTS OF INCOME (Thousands) 1997 1996 1995 ---- ---- ---- OPERATING INCOME/(EXPENSE) Dividend income from Bank $3,000 $3,600 $1,600 Investment income 139 123 92 Interest on federal and state income tax refunds 298 Other income 21 23 33 Interest expense (20) Employee benefits expense (1,183) (1,399) (993) Other expense (155) (238) (143) ----- ----- ----- INCOME BEFORE DISTRIBUTED INCOME OF SUBSIDIARIES 1,822 2,109 867 UNDISTRIBUTED INCOME OF SUBSIDIARIES (236) 1,049 987 ----- ----- --- INCOME BEFORE TAX 1,586 3,158 1,854 BENEFIT FOR INCOME TAX 135 666 1,185 --- --- ----- NET INCOME $1,721 $3,824 $3,039 ====== ====== ======
40 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (continued) - ---------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS - ---------------------------------- (in thousands) 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,721 $3,824 $3,039 Adjustments to reconcile net income to net cash from operating activities Undistributed (income)/loss of Bank 15 (1,125) (990) Undistributed (income)/loss of Insurance Company (54) 11 Undistributed loss of Loan Store 276 65 Additional paid in capital from release of ESOP shares 184 244 172 Gain on sale of securities (10) Accretion (82) (12) Change in income taxes receivable (385) (387) (173) Change in interest receivable 20 (4) (9) Change in dividends receivable from Bank 500 (600) Change in other assets 62 (1,343) 130 Change in other liabilities (158) 751 614 ----- --- --- Net cash from operating activities 2,089 1,424 2,783 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Sales of investment securities 1,000 Principal repayments of investment securities 26 Purchase of investment securities (1,006) ----- ----- ------- Net cash from investing activities 1,000 26 (1,006) ----- -- ------- CASH FLOWS FROM FINANCING ACTIVITIES Investment in Insurance Company (47) Investment in Loan Store (500) (500) Dividends paid (1,264) (1,031) (895) Issuance of common shares 0 Purchase of treasury stock (1,173) (368) (745) ------- ----- ----- Net cash from financing activities (2,937) (1,399) (2,187) ------- ------ ------- NET CHANGE IN CASH AND CASH EQUIVALENTS 152 51 (410) --- -- ----- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 712 661 1,071 --- --- ----- CASH AND CASH EQUIVALENTS AT END OF YEAR $864 $712 $661 ==== ==== ==== CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest $0 $0 $20 Income taxes $0 $0 $(954)
41 43 NOTES TO THE CONSOLIDATED FINANCIAL 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, 1997 and 1996, 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 $677,000 for 1997, $814,000 for 1996, and $400,000 for 1995. 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 Exercised (27,950) $47.00 - $59.50 ------- --------------- Balance: December 31, 1997 51,800 $13.50 - $31.50 ======= ===============
42 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (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 $3,445,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 1997. 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, 1997, commitments to make loans amounted to approximately $45,026,000 and commitments under outstanding standby letters of credit amounted to approximately $1,065,000. 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. 43 45 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, 1997, and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 25, 1998 44 46 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS Management is responsible for the preparation and presentation of the financial statements and related notes on the preceding pages. The statements have been prepared in conformity with 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 financial statements. In meeting its responsibility for the accuracy of the 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 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 financial statements in the Annual Report have been audited by Arthur Andersen LLP, independent public accountants, for 1997, 1996, and 1995. 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 financial statements in conformity with generally accepted accounting principles. 45 47 SUMMARY OF SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- EARNINGS (thousands) Total interest income $29,265 $28,233 $26,262 $24,179 $25,130 Total interest expense 12,937 11,800 11,112 9,356 9,751 Net interest income 16,328 16,433 15,150 14,823 15,379 Provision for loan losses 1,325 66 165 276 Total noninterest income 4,991 5,750 3,987 4,068 3,771 Total noninterest expense 17,689 16,694 15,931 14,609 14,106 Provision for income taxes 584 1,599 167 1,449 1,665 Net income 1,721 3,824 3,039 2,668 3,103 Cash dividend declared 1,264 1,031 895 919 923 PER SHARE DATA Net income $2.42 $5.19 $4.05 $3.48 $4.02 Cash dividends declared 1.80 1.40 1.20 1.20 1.20 Book value at period end 46.79 46.40 43.18 36.00 36.13 Weighted average share outstanding 710,967 736,887 750,286 767,419 772,525 PERIOD END TOTALS (thousands) Loans, net of deferred loan fees and unearned income $258,115 $271,476 $241,662 $223,622 $219,139 Allowance for loan losses 2,702 2,435 2,777 2,555 2,310 Total assets 359,751 382,038 368,013 369,470 364,001 Total deposits 264,413 289,180 288,984 295,784 306,135 Long-term debt 42,000 41,500 21,400 15,400 16,600 RATIOS Loan to deposit 97.62% 93.88% 83.62% 75.59% 71.58% Loan to total funding 80.06 79.03 72.80 65.98 66.32 Return on average assets 0.46 1.04 0.86 0.75 0.88 Average stockholders' equity to average total assets 9.09 8.91 8.53 8.01 7.58 Return on average stockholders' equity 5.06 11.67 10.09 9.41 11.61 Dividend payout ratio (dividends divided by net income) 73.45 26.96 29.45 34.45 29.75
46 48 MARKET FOR HORIZON'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS Horizon common stock is traded on the over-the-counter market. ABN AMRO 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 ABN AMRO. 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 1997 and 1996.
Common Stock Dividends Bid Prices Declared 1996 High Low Per Share ---- ---- --- --------- 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 1997 ---- First Quarter $48.75 $45.50 $.45 Second Quarter 53.50 48.75 .45 Third Quarter 55.50 53.50 .45 Fourth Quarter 58.75 55.50 .45
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, 1997 is 707. 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. 47 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
State of Name Under Which Subsidiary Incorporation Business is Done - ---------- ------------- ---------------- Horizon Bank, National Association Indiana Horizon Bank IMS Investment Management, National Association Indiana IMS Investment Management (a subsidiary of Horizon Bank) HBC Insurance Company, Inc. Arizona HBC Insurance Company The Loan Store, Inc. Indiana The Loan Store
18 EX-27 4 EXHIBIT 27
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 19,506 219 0 0 48,638 11,447 11,756 258,115 2,702 359,751 264,413 16,000 3,907 42,000 0 0 720 27,989 359,751 24,574 4,691 0 29,265 10,343 12,937 16,328 1,325 0 17,689 2,305 0 0 0 1,721 2.42 2.42 4.79 319 862 0 44 2,435 1,441 383 2,702 2,702 0 565
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