-----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, Vf50DAHdL9/2e1T0j5fqIjxh15qkMXSeKx9iyGXRBWtPB8SLKFNmWXGqBedZXjln CBF2vXjKeFgoYbZh1uvRhw== 0000950152-99-002182.txt : 19990323 0000950152-99-002182.hdr.sgml : 19990323 ACCESSION NUMBER: 0000950152-99-002182 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 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: 99569675 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, 1998 ----------------- 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, 677,804 shares outstanding at January 31, 1999 -------------------------------------------------------------------------- (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 January 31, 1999 was $27,215,000. 2 Documents Incorporated by Reference ----------------------------------- Part of Form 10-K into which Document portion of document is incorporated -------- ----------------------------------- Portions of the Registrant's 1998 I, II, VI annual report to shareholders Portions of the Registrant's III proxy statement to be filed for its May 27, 1999 annual meeting of shareholders Except as provided in Part I, Part II and Part III, no part of the Registrant's 1998 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 subsidiaries, IMS Investment Management, N.A. (IMS) and Phoenix Insurance Services, Inc. (Phoenix) 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, commercial and personal property and casualty insurance 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, commercial and personal property and casualty insurance services and other services incident to banking. Bank maintains four facilities located within LaPorte County, Indiana and four facilities located in Porter County, Indiana. At December 31, 1998, Bank had total assets of $408,443,000 and total deposits of $322,401,000. 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 $2,007,000, investment securities totaling approximately $377,000 and taxes receivable of approximately $287,000 at December 31, 1998. The business of the Registrant, Bank, IMS, Phoenix, 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 71% in 1998, 72% in 1997, and 68% in 1996 of the total consolidated revenue. Revenues from investment securities accounted for 13% in 1998, 14% in 1997 and 15% in 1996 of total consolidated revenue. The Registrant has no employees and there are approximately 198 full and part-time persons employed by Bank, IMS and Loan Store as of December 31, 1998. 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. 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 three 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. 3 4 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, Phoenix, 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. 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. 4 5 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 SALE 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 1998 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, 1998, 1997 and 1996:
(in thousands) 1998 1997 1996 AVAILABLE FOR SALE U.S. Treasury and U.S. Government agencies and corporations $12,568 $3,965 $4,965 Mortgage-backed securities 41,167 39,985 49,683 Other securities 4,289 4,020 4,248 Unrealized gain/(loss) 561 668 145 -------------------------------------------------------- Total investment securities available for sale $58,585 $48,638 $59,041 ======================================================== HELD TO MATURITY U.S. Treasury and U.S. Government agencies and corporations $1,630 $2,040 $2,793 Obligations of states and political subdivisions 10,116 9,407 10,017 -------------------------------------------------------- Total investment securities held to maturity $11,746 $11,447 $12,810 ======================================================== Total investment securities available for sale and held to maturity $70,331 $60,085 $71,851 ========================================================
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, 1998:
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 agency $7,171 6.13% $5,474 6.18% securities(1) Other securities 4,350 6.90% Mortgage-backed securities (2) 434 5.64% 6,589 5.97% 4,506 6.69% 30,061 6.34% --------------------------------------------------------------------------------------- Total $11,955 6.39% $12,063 6.07% $4,506 6.69% $30,061 6.34% HELD TO MATURITY U.S. Government agency securities $1,630 7.67% Obligations of states and political 1,670 4.77% 2,325 5.30% 6,121 4.96% subdivisions --------------------------------------------------------------------------------------- Total $3,300 6.20% $2,325 5.30% $6,121 4.96% $0 0.00% Total investment securities available for $15,255 6.35% $14,388 5.94% $10,627 5.69% $30,061 6.34% 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, 1998. 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) 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------- Commercial, financial, agricultural and $76,682 $73,177 $75,460 $66,125 $67,177 commercial tax-exempt loans Real estate mortgage loans 152,390 120,345 133,739 119,739 105,512 Installment loans 61,274 64,593 62,277 55,798 50,933 -------------------------------------------------------------------------------- Total loans $290,346 $258,115 $271,476 $241,662 $223,622 ================================================================================
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, 1998:
Maturing or repricing (thousands) One year or One through After five Total less five years years ----------------------------------------------------------------- Commercial, financial, agricultural $33,203 $36,528 $6,951 $76,682 and 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, $29,171 $14,308 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) 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------- (a) Loans accounted for on a nonaccrual $64 $319 $316 $668 $2,794 basis (b) Accruing loans which are 830 862 682 533 474 contractually 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 $894 $1,181 $998 $1,201 $3,268 ============================================================================
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. 7 8 III. LOAN PORTFOLIO (Continued) (Thousands) Gross interest income that would have been $64 recorded on nonaccrual loans outstanding as of December 31, 1998 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, 1998 and included in net income for the period. Interest income not recognized during the $64 period on nonaccrual loans outstanding as of December 31, 1998. 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 $341,000 at December 31, 1998. 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, 1998 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 $133,000 held as other real estate owned, net of allowance, there are no other interest-bearing assets as of December 31, 1998 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) 1998 1997 1996 1995 1994 ----------------------------------------------------------------------- LOANS Loans outstanding at the end of the period (1) 290,346 258,115 271,476 241,662 223,622 Average loans outstanding during the period (1) 268,209 269,348 256,580 226,198 218,053 (1) Net of unearned income and deferred loan fees ALLOWANCE FOR LOAN LOSSES 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------- Balance at beginning of the period $2,702 $2,435 $2,777 $2,555 $2,310 Loans charged-off: Commercial and agricultural loans (39) (56) (11) (45) Real estate mortgage loans (2) (1) (14) (17) Installment loans (1,275) (1,384) (532) (231) (221) ------- ------- ----- ----- ----- Total loans charged-off (1,316) (1,441) (557) (293) (221) Recoveries of loans previously charged-off: Commercial and agricultural loans 3 50 27 358 143 Real estate mortgage loans 3 8 Installment loans 395 333 122 149 158 --- --- --- --- --- Total loan recoveries 401 383 149 515 301 Net loans (charged-off)/recovered (915) (1,058) (408) 222 80 Provision charged to operating expense 1,000 1,325 66 165 ------------------------------------------------------------------------------- Balance at the end of the period $2,787 $2,702 $2,435 $2,777 $2,555 =============================================================================== Ratio of net (charge-offs)/recoveries to average (0.34)% (0.39)% (0.16)% 0.10% 0.04% 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. The volume of charge-offs in these portfolios was beginning to reduce in late 1998. 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)
1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------ 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, $725 0.2% $765 0.3% $576 0.2% $733 0.3% $1,434 0.6% financial and agricultural Real estate 61 0.0% 82 0.0% 102 0.0% 139 0.1% 111 0.0% mortgage Installment 1,800 0.6% 1,290 0.5% 1,075 0.4% 655 0.3% 407 0.2% Unallocated 201 565 682 1,250 603 ------------------------------------------------------------------------------------------------------------------- Total $2,787 1.0% $2,702 1.0% $2,435 0.9% $2,777 1.1% $2,555 0.9% ===================================================================================================================
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 methodology resulted in a $325 increase in the portion of the allowance allocated to installment loans in 1996. In 1998, $277 thousand of the increase in the allowance allocated to installment loans is related to loans originated at the Loan Store. The underwriting standards of the subsidiary have been evaluated and strengthened in 1998. Management expects the current allocation of the allowance to continue through 1999. The remaining increase in the allocation associated with installment loans is related to the methodology adopted in 1996 in which the higher of the Bank or the industry average charge-off rate is utilized. The industry average historical rate was higher than Banks historical charge-off rate in 1998 resulting in an additional allocation to the installment loan portfolio of $160 thousand. 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) 1998 1997 1996 ----------------------------------------------- Outstanding at year end $0 $0 $11,562 Approximate weighted average interest 0.00% 0.00% 5.14% rate at year-end Highest amount outstanding as of any $0 $0 $14,822 month-end during the year Approximate average outstanding during $0 $0 $10,961 the year Approximate weighted average interest 0.00% 0.00% 5.07% 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: 8343 Indianapolis Blvd., Highland, Indiana 510 W. McKinley, Mishawaka, 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 1998 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 1998 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, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 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 27, 1999 ("1999 Proxy Statement"). The 1999 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 1998 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 16 Consolidated Statements of Income 17 Consolidated Statements of Changes in Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 - 20 Notes to the Consolidated Financial Statements 21 - 44 Report of Independent Public Accountants 45
(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 ------------------- The following Forms 8-K were filed during 1998: June 16, 1998 - Change in Independent Accountants October 20, 1998 - Termination of President and Chief Administrative Officer (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 3/17/99 /s/ Robert C. Dabagia ------------- ------------------------------------------- Robert C. Dabagia Chairman & Chief Executive Officer Date 3/17/99 /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 ---- ------------------- 3/17/99 /s/ Dale W. Alspaugh - ------- --------------------------------- Dale W. Alspaugh, Director 3/17/99 /s/ Russell L. Arndt - ------- --------------------------------- Russell L. Arndt, Director 3/17/99 /s/ George R. Averitt - ------- --------------------------------- George R. Averitt, Director 3/17/99 /s/ Robert C. Dabagia - ------- --------------------------------- Robert C. Dabagia, Director Chairman & Chief Executive Officer 3/17/99 /s/ Craig M. Dwight - ------- --------------------------------- Craig M. Dwight, Director President 3/17/99 /s/ Myles J. Kerrigan - ------- --------------------------------- Myles J. Kerrigan, Director 3/17/99 /s/ Robert E. McBride - ------- --------------------------------- Robert E. McBride, Director 3/17/99 /s/ Larry N. Middleton - ------- --------------------------------- Larry N. Middleton, Director 3/17/99 /s/ Gene L. Rice - ------- --------------------------------- Gene L. Rice, Director 3/17/99 /s/ Susan D. Sterger - ------- --------------------------------- Susan D. Sterger, Director 3/17/99 /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 12/31/96 FORM 10-K 10.6 MATERIAL CONTRACTS-FIRST AMENDMENT TO INCORPORATED BY REFERENCE SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN TO 12/31/96 FORM 10-K 10.7 MATERIAL CONTRACTS-SECOND AMENDMENT TO INCORPORATED BY REFERENCE SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN TO 12/31/96 FORM 10-K 10.8 MATERIAL CONTRACTS - AGREEMENT REGARDING INCORPORATED BY REFERENCE EMPLOYMENT CONTRACTS TO 12/31/96 FORM 10-K 11 STATEMENT REGARDING COMPUTATION OF PER SHARE ANNUAL REPORT ATTACHED EARNINGS-REFER TO ANNUAL REPORT FOOTNOTE 1 (EXHIBIT 13) 13 REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 ATTACHED (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, 1998 17 2 HORIZON BANCORP AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Table Dollar Amounts in Thousands) ANALYSIS OF FINANCIAL CONDITION INVESTMENT SECURITIES Horizon maintains a high quality investment portfolio with very low credit risk. Investment securities totaled $66.358 million at December 31, 1998 and consisted of U.S. Treasury and Government Agency securities of $14.275 million (21%); Municipal securities of $10.116 million (15%); Equity securities of $392 thousand (1%); and Mortgage-Backed securities of $41.590 million (63%). Total investment securities increased 17.1% from 1997. The increase is primarily in Government Agency securities and was funded by the increase in deposits and FHLB Advances. 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, 1998, the mortgage-backed securities in the investment portfolio had an average life of 4.8 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. 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, 1998, this portion of the investment portfolio had a book value of $10.116 million and of that amount, $5.832 million (58%) were rated AAA; $1.895 million (19%) were rated AA or A; and $2.389 million (23%) were not rated. Most of the not rated bonds were issued by local municipalities in Northwest Indiana. At December 31, 1998, 82.3% of investment securities were classified as available for sale compared to 79.7% at December 31, 1997. 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 $561 thousand, which resulted in a $336 thousand addition, net of tax, to stockholders' equity at December 31, 1998. This compared to a $400 thousand, net of tax, addition to stockholders' equity at December 31, 1997. As a member of the Federal Reserve and Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of each entity. The investment in common stock is based on a predetermined formula. At December 31, 1998, Horizon has investments in the common stock of the Federal Reserve and Federal Home Loan Bank totaling $3.973 million compared to $3.623 million at December 31, 1997. At December 31, 1998, Horizon does not maintain a trading account and is not using any derivative products for hedging or other purposes. (1) 3 LOANS Total loans, the principal earning asset of the Bank, were $290.346 million at December 31, 1998. The current level of loans is an increase of 12.49% from the December 31, 1997 level of $258.115 million. As the table below indicates, the increases are primarily in 1 - 4 family real estate loans which increased $32.149 million or 27.26%.
DOLLAR PERCENT DECEMBER 31 1998 1997 CHANGE CHANGE - ---------------------------------------------------------------------------------------------------------------------------- Real estate loans 1 - 4 family $150,066 $117,917 $32,149 27.26% Multi-family 312 433 (121) (27.94) Other 2,012 1,995 17 .85 ------------------------------------------------------ Total 152,390 120,345 32,045 26.63 ------------------------------------------------------ Commercial loans Working capital and equipment 61,725 57,188 4,537 7.93 Real estate, including agriculture 5,277 5,002 275 5.50 Tax exempt 8,673 9,489 (816) (8.60) Other 1,007 1,498 (491) (32.78) ------------------------------------------------------ Total 76,682 73,177 3,505 4.79 ------------------------------------------------------ Consumer loans Auto 16,411 19,354 (2,943) (15.21) Recreation 1,381 1,697 (316) (18.62) Real estate/home improvement 24,210 21,828 2,382 10.91 Home equity 2,782 3,941 (1,159) (29.41) Credit cards 5,637 6,806 (1,169) (17.18) Unsecured 3,229 4,620 (1,391) (30.11) Other 7,624 6,347 1,277 20.12 ------------------------------------------------------ Total 61,274 64,593 (3,319) (5.14) ====================================================== Grand total $290,346 $258,115 $32,231 12.49% =======================================================================
The acceptance and management of credit risk is an integral part of Bank's business as a financial intermediary. The Bank has established rigorous underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements. The Bank engages an independent third-party loan review function that regularly reviews asset quality. Real Estate Loans Real estate loans totaled $152.390 million or 52% of total loans as of December 31, 1998, compared to $120.345 million or 47% as of December 31, 1997. 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 $6.215 million and $4.508 million at December 31, 1998 and 1997, respectively. (2) 4 In addition to the customary real estate loans described above, the Bank also has outstanding on December 31, 1998, $2.782 million in home equity lines of credit and $3.941 million at December 31, 1997. 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, 1998, the real estate loan portfolio reflected a wide range of interest rate and repayment patterns, but could generally be categorized as follows:
1998 1997 ---------------------------------------------------------------------------------------- PERCENT OF Percent of AMOUNT PORTFOLIO YIELD Amount Portfolio Yield ---------------------------------------------------------------------------------------- Fixed rate Monthly payment $ 99,168 65.08% 7.43% $ 47,007 39.06% 7.86% Biweekly payment 18,718 12.28 7.47 23,345 19.40 7.82 Adjustable rate Monthly payment 33,963 22.28 7.20 49,409 41.06 7.57 Biweekly payment 541 .36 7.75 584 .48 8.36 ------------------------------ ------------------------------ Total $152,390 100.00% 7.69% $120,345 100.00% 7.76% ============================== ==============================
In addition to the real estate loan portfolio, the Bank sold real estate loans which it services. On December 31, 1998, the portfolio serviced consisted of 381 loans totaling $23.010 million. Total loans sold during 1998 totaled $2.765 million. Commercial Loans Commercial loans totaled $76.682 million or 26% of total loans as of December 31, 1998, compared to $73.177 million or 28% as of December 31, 1997. Commercial loans consisted of the following types of loans at December 31:
1998 1997 ---------------------------------------------------------------------------------------- PERCENT OF Percent of NUMBER AMOUNT PORTFOLIO Number Amount Portfolio ---------------------------------------------------------------------------------------- SBA guaranteed loans 24 $ 3,028 3.95% 34 $ 4,001 5.47% Municipal government 53 9,349 12.19 61 11,553 15.79 Lines of credit 143 15,159 19.77 153 17,875 24.43 Real estate and equipment term loans 297 49,146 64.09 303 39,748 54.31 ---------------------------------------------------------------------------------------- Total 517 $76,682 100.00% 551 $73,177 100.00% ========================================================================================
(3) 5 Consumer Loans Consumer loans totaled $61.274 million or 21% of total loans as of December 31, 1998, compared to $64.593 million or 25% as of December 31, 1997. The total consumer loan portfolio decreased 5.14% in 1998. Allowance and Provision for Loan Losses The allowance for loan losses represents the Bank's and The Loan Store'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. The Bank and The Loan Store utilize a loan grading system that helps identify, monitor, and address asset quality problems, should they arise, in an adequate and timely manner. Each quarter, the Bank and The Loan Store review 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. The Bank and The Loan Store also review 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, 1998, the allowance for loan losses was .96% of total loans outstanding, compared to 1.05% at December 31, 1997. During 1998, the provision for loan losses totaled $1.000 million compared to $1.325 million in 1997. Nonperforming Loan 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:
1998 1997 1996 - ------------------------------------------------------------------------------------------------ Nonperforming loans $894 $1,181 $998
Nonperforming loans total 32% of the allowance for loan losses at December 31, 1998 compared to 44% and 41% of the allowance for loan losses on December 31, 1997 and 1996, respectively. A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 - 4 family residences, residential construction loans, automobile, home equity, 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 of 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. (4) 6 Other real estate owned (OREO) and the related allowance for OREO losses for the previous three years ending December 31, 1998 is as follows:
1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Other real estate owned $133 $125 $500 Allowance for OREO losses 151 ------------------------------------------------------- Net other real estate owned $133 $125 $349 =======================================================
DEPOSITS The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank when it can do so at interest rates and terms that are superior to those required for deposited funds. Total deposits were $322.401 million at December 31, 1998 compared to $264.413 million at December 31, 1997 or an increase of 21.93%. Below is a table of average deposits and rates by category for the previous three years ended December 31.
AVERAGE BALANCE OUTSTANDING FOR THE YEAR AVERAGE RATE PAID FOR THE YEAR ENDED DECEMBER 31 ENDED DECEMBER 31 ---------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand deposits $ 58,032 $ 45,016 $ 33,680 Interest-bearing demand deposits 18,088 37,256 53,851 2.64% 1.62% 1.48% Savings deposits 50,194 61,089 70,386 2.17 2.24 2.25 Time deposits 161,029 147,639 132,780 5.64 5.67 5.44 --------------------------------------------- Total deposits $287,343 $291,000 $290,697 =============================================
During late 1997, Horizon changed its standard consumer checking accounts from interest bearing to noninterest bearing. Remaining in the interest-bearing demand deposits is a high yield consumer account that requires relatively high balances. These new products caused the changes in the average balances and average rates paid as displayed in the table above. 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. (5) 7 As of December 31, 1998, 126,874 shares had been allocated to employees combined with 164,483 unallocated shares places a total of 291,357 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. 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 ESOPs result in costs only and no return of capital is realized. 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. As of December 31, 1998, the ESOP owned 34.22% of the issued 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 stakeholder - its customers, shareholders, employees, and communities. At December 31, 1998, the ESOP paid $657,810 to Horizon in order to release 20,577 shares which were allocated to participants. CAPITAL RESOURCES The capital resources of Horizon and the Bank remain strong and exceed regulatory capital ratios for "well capitalized" banks at December 31, 1998. Stockholders' equity totaled $31.886 million ($4.418 million from ESOP) as of December 31, 1998 compared to $32.757 million ($4.048 million from ESOP) as of December 31, 1997. At year end 1998, the ratio of stockholders' equity to assets was 7.66% compared to 9.11% for 1997. This decline is a result of low earnings, the repurchase of treasury shares, and the growth in assets, primarily loans. Horizon selectively purchases shares that become available in the market from time to time. During 1998, management purchased 36,785 shares at a cost of $2.115 million compared to 22,178 shares at a cost of $1.173 thousand, and 8,778 shares at a cost of $368 thousand for 1997 and 1996, respectively. Horizon paid dividends in the amount of $1.80 per share in 1998, $1.80 per share in 1997, and $1.40 per share in 1996. The dividend pay-out ratio (dividends as a percent of net income) was 114% during 1998 as compared to 73% and 27% in 1997 and 1996, respectively. The dividend pay-out ratio is high in 1998 and 1997 because of lower than anticipated earnings. The dividend pay-out ratio is low in 1996 because net income includes the gain on sale of OREO of approximately $1 million, net of tax. For additional information regarding dividend conditions, see Note 1 of the Notes to the Consolidated Financial Statements. As of December 31, 1998, 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. (6) 8 TRUST AND INVESTMENT MANAGEMENT On October 1, 1996, the Bank formed a wholly-owned subsidiary, which manages the majority of the trust and investment management accounts. Assets under management has a book value of $258 million at December 31, 1998 compared to $311 million at December 31, 1997. This represents a 17.0% decrease from 1997. The book value of assets held at December 31, 1998 by asset type are as follows:
BOOK VALUE PERCENTAGE - ---------------------------------------------------------------------------------------------------------------------------- Cash $ 935 .36% Money market funds 72,697 28.18 Government and agency bonds 40,982 15.89 Municipal bonds 18,211 7.06 Corporate bonds 17,222 6.68 Common and preferred stock 79,575 30.84 Mutual funds 28,344 10.99 ------------------------------------- Total $257,966 100.00% =====================================
A variety of types of investment accounts including personal trusts, agencies, estates and guardianships, corporate agencies, and employee benefit agencies and trusts are managed by Horizon. The total book values of each of these types of accounts at December 31, 1998 are as follows:
BOOK MARKET VALUE PERCENTAGE VALUE PERCENTAGE - ---------------------------------------------------------------------------------------------------------------------------- Personal $ 56,225 21.80% $ 80,095 25.53% Agency 53,278 20.66 65,326 20.83 Employee benefit 96,886 37.56 115,246 36.74 Cash management 35,161 13.63 35,123 11.19 Retail accounts 16,393 6.35 17,740 5.66 Other 23 156 .05 ------------------------------------------------------------- Total $257,966 100.00% $313,686 100.00% =============================================================
RESULTS OF OPERATIONS NET INCOME Consolidated net income was $1.083 million or $1.58 per share for 1998 compared to $1.721 million or $2.42 per share and $3.824 million or $5.19 per share in 1997 and 1996, respectively. In November 1996, a gain on sale of OREO was recorded totaling approximately $1 million or $1.35 per share, net of tax. 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 earnings assets. Horizon's earning assets consist of loans, investment securities, and interest-bearing balances in banks. (7) 9
1998 1997 1996 ------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------- ASSETS Interest-bearing assets Loans - total (1) (3) $268,209 $24,100 8.99% $269,348 $24,574 9.12% $256,580 $23,096 9.00% Taxable investment securities, including FRB and 57,242 3,638 6.36 55,963 3,968 7.09 67,833 4,504 6.64 FHLB stock Nontaxable investment securities (2) 9,721 447 4.60 10,000 435 4.35 10,138 455 4.49 Interest-bearing balances and money market investments (4) 773 29 3.75 1,348 60 4.45 968 46 4.75 Bankers acceptances Federal funds sold 6,441 345 5.36 4,170 228 5.47 2,476 132 5.33 ------------------ ------------------ ------------------ Total interest- bearing assets 342,386 28,559 8.34 340,829 29,265 8.59 337,995 28,233 8.35 ------ ------ ------ Noninterest-earning assets Cash and due from 12,917 13,874 12,879 banks Allowance for loan (2,826) (2,320) (2,655) losses Other assets 22,328 21,799 19,547 ------- ------ ------ Total assets $374,805 $374,182 $367,766 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Savings deposits $ 50,194 1,091 2.17 $ 61,089 1,371 2.24 $ 70,386 1,587 2.25 Interest-bearing demand deposits 18,088 477 2.64 37,256 605 1.62 53,851 798 1.48 Time deposits 161,029 9,010 5.60 147,639 8,367 5.67 132,780 7,221 5.44 Short-term borrowings 4,004 295 7.37 1,911 110 5.76 13,529 713 5.27 Long-term debt 47,121 2,658 5.64 43,493 2,484 5.71 27,306 1,481 5.42 ------------------- ------------------- ------------------- Total interest-bearing liabilities 280,436 13,531 4.82 291,388 12,937 4.44 297,852 11,800 3.96 ------ ------ ------ Noninterest-bearing liabilities Demand deposits 58,032 45,016 33,680 Other liabilities 3,276 3,771 3,479 Stockholders' equity 33,061 34,007 32,755 -------- ------ ------ Total liabilities and stockholders' equity $374,805 $374,182 $367,766 ======== ======== ======== Net interest income $15,028 $16,328 $16,433 ======= ======= ======= Net interest income as a percent of interest-bearing assets 4.39% 4.79% 4.86% ==== ==== ====
(1) Nonaccruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees. (2) Yields are not presented on a tax-equivalent basis. (3) Loan fees and late fees included in interest on loans aggregated $1,295,000, $1,248,000, and $1,122,000 in 1998, 1997, and 1996, respectively. (4) Horizon has no foreign office and, accordingly, no assets or liabilities to foreign operations. Horizon's subsidiary bank had no funds invested in Eurodollar Certificates of Deposit at December 31, 1998. (8) 10
1998 - 1997 1997 - 1996 INCREASE/(DECREASE) INCREASE/(DECREASE) ---------------------------------------------------------------------------- CHANGE DUE CHANGE DUE CHANGE DUE CHANGE DUE TOTAL CHANGE TO VOLUME TO RATE TOTAL CHANGE TO VOLUME TO RATE ---------------------------------------------------------------------------- INTEREST INCOME Loans - total $ (474) $(104) $(370) $1,478 $1,162 $316 Taxable investment securities (330) 89 (419) (536) (827) 291 Nontaxable investment securities 12 (12) 24 (20) (6) (14) Interest-bearing balances and money market (31) (23) (8) 14 17 (3) investments Federal funds sold 117 122 (5) 96 93 3 ---------------------------------------------------------------------------- Total interest income (706) 72 (778) 1,032 439 593 ---------------------------------------------------------------------------- INTEREST EXPENSE Savings deposits (280) (237) (43) (216) (209) (7) Interest-bearing demand deposits (128) (399) 271 (193) (264) 71 Time deposits 643 750 (107) 1,146 833 313 Short-term borrowings 185 147 38 (603) (663) 60 Long-term debt 174 205 (31) 1,003 921 82 ---------------------------------------------------------------------------- Total interest expense 594 466 128 1,137 618 519 ---------------------------------------------------------------------------- NET INTEREST EARNINGS $(1,300) $(394) $(906) $ (105) $ (179) $ 74 ============================================================================
Horizon's average earning assets were $342.386 million in 1998 compared to $340.829 million in 1997 and $337.995 million in 1996. The net interest margin for 1998 was 4.39% compared to 4.79% and 4.86% in 1997 and 1996, respectively. The decrease in net interest margin from 1997 to 1998 was primarily due to the decrease in rate of loan and investment portfolios, the increase in volume in the time deposit portfolio and the reduction in volume in the interest-bearing demand deposits and savings portfolios. The decrease in net interest margin from 1996 and 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. 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 the Bank's markets. Service charges on deposits were $2.255 million, $2.020 million, and $1.573 million for 1998, 1997, and 1996, respectively. Fiduciary fees were $2.141 million in 1998 compared to $2.423 million and $2.094 million in 1997 and 1996 respectively. (9) 11 NONINTEREST EXPENSE Noninterest expense totaled $18.053 million in 1998 compared to $17.689 million and $16.694 million in 1997 and 1996, respectively. The increase in 1998 related to an increase in salaries and benefits and occupancy expense partially offset by a reduction in data processing and equipment expenses. 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. Salaries and benefits increased 13.50% during 1998 compared to a decrease of 4.09% for 1997 and an increase of 3.67% for 1996. The increase in 1998 is primarily a result of the payment of the severance benefit after the termination of the President and Chief Administrative Officer who was a party to an employment contract and increased expenses related to ESOP. Total other expenses decreased 2.50% in 1998 and increased 11.40% and 4.89% in 1997 and 1996, respectively. The primary factors in the reduction of the 1998 expenses were: 1) $149 thousand decrease in supplies and printing expenses, 2) $256 thousand decrease in advertising expenses, 3) $247 thousand increase in professional fees, 4) $168 thousand decrease in training expenses, and; 5) $139 thousand decrease in outside services and consultants. The primary factors contributing to the 1997 increase in other expense were: 1) $273 thousand increase in advertising expense, primarily related to the change in the Bank's name, 2) $195 thousand increase in supplies and printing expenses, and; 3) $154 thousand increase in outside services and consultants. INCOME TAXES Income tax expense totaled $345 thousand in 1998 compared to $584 thousand and $1.599 million in 1997 and 1996, respectively. The effective tax rate was 24.16%, 25.34%, and 29.49% for 1998, 1997, and 1996, respectively. 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 1998, cash flows were generated from earnings of $1.1 million, an increase in deposits of $58.0 million and an increase in FLHB borrowings of $12.0 million. Cash flows were used for an $34.0 million increase in loan demand, a $3.4 million purchase of premises and equipment, a $10.2 million increase in investment securities and a $12.0 million decrease in short-term borrowings. The net cash and cash equivalent position increased $11.5 million, primarily in cash and due from banks and federal funds sold. (10) 12 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, 1998, Horizon had a negative GAP position of 1:0.72. This indicates that the total amount of assets repricing within one year were 72% of the total amount of liabilities repricing within the same time period. This compares to a negative GAP position of 1:0.96 at December 31, 1997.
RATE SENSITIVITY GREATER THAN GREATER THAN 3 MONTHS 6 MONTHS GREATER 3 MONTHS OR AND LESS THAN AND LESS THAN THAN LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL ----------------------------------------------------------------------- Loans $48,647 $14,284 $31,592 $193,036 $287,559 Money market investments 598 598 Interest-bearing balances with Banks 225 225 Federal funds sold 18,500 18,500 Investment securities and FRB and FHLB stock 10,138 8,245 10,034 41,914 70,331 Other assets 38,941 38,941 ----------------------------------------------------------------------- Total assets $77,883 $22,529 $41,626 $274,116 $416,154 ======================================================================= Noninterest-bearing deposits $ 58,658 $ 58,658 Interest-bearing deposits $85,524 $39,216 $48,887 90,116 263,743 Borrowed funds 4,000 5,000 15,000 34,000 58,000 Other liabilities 3,867 3,867 Stockholders' equity 31,886 31,886 ----------------------------------------------------------------------- Total liabilities and stockholders' equity $89,524 $44,216 $63,887 $218,527 $416,154 ======================================================================= GAP $(11,641) $(21,687) $(22,261) $ 55,589 Cumulative GAP $(11,641) $(33,328) $(55,589)
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 $54.953 million at December 31, 1998 to be nonrate sensitive. (11) 13 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, embedded options risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arise because of differences in the timing of when those interest rate changes affect Horizon's assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon's objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position including the sale of mortgage loans on the secondary market and varying maturities of FHLB advances, certificates of deposit funding, and investment securities. The table which follows provides information about Horizon's financial instruments that are sensitive to changes in interest rates as of December 31, 1998. Horizon had no derivative financial instruments or trading portfolio as of December 31, 1998. 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. (12) 14
QUANTITATIVE DISCLOSURE OF MARKET RISK 2004 AND FAIR VALUE 1999 2000 2001 2002 2003 BEYOND TOTAL 12/31/98 ---------------------------------------------------------------------------------------- RATE-SENSITIVE ASSETS Fixed interest rate loans $ 40,503 $29,729 $21,054 $23,847 $19,204 $ 70,564 $204,901 $204,902 Average interest rate 9.19% 8.88% 8.10% 7.70% 7.49% 7.43% 8.10% Variable interest rate loans 15,126 9,409 6,066 6,645 5,798 42,400 85,444 85,162 Average interest rate 8.55% 8.68% 9.74% 8.84% 8.55% 8.10% 8.45% Total loans 55,630 39,138 27,120 30,492 25,002 112,964 290,346 290,064 Average interest rate 9.01% 8.83% 8.47% 7.95% 7.74% 7.68% 6.57% Securities, including FRB and FHLB stock 20,487 8,444 13,125 8,810 6,274 13,191 70,331 70,675 Average interest rate 6.26% 6.06% 6.30% 6.13% 5.93% 5.36% 6.03% Other interest-bearing assets 19,098 225 19,323 19,323 Average interest rate 4.76% 4.75% 5.50% Total earnings assets 95,215 47,582 40,245 39,302 31,276 126,380 380,000 380,062 Average interest rate 7.57% 8.37% 7.76% 7.54% 7.37% 7.44% 6.02% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits $ 587 293 147 $ 57,631 $ 58,658 $ 58,658 NOW accounts 326 163 81 32,002 32,572 32,572 Average interest rate 1.76% 1.76% 1.76% 1.76% 1.76% Savings and money market accounts 457 228 114 44,878 45,677 45,677 Average interest rate 2.25% 2.25% 2.25% 2.25% 2.25% Certificates of deposit 151,390 20,370 11,492 $ 2,086 $ 156 185,494 189,168 Average interest rate 5.45% 5.56% 5.35% 5.17% 5.47% 5.48% Total deposits 152,760 21,054 11,834 2,086 156 134,511 322,401 326,075 Average interest rate 5.40% 5.38% 5.19% 5.17% 5.47% .73% 2.82% Fixed interest rate borrowings 20,000 4,000 10,000 20,000 54,000 54,032 Average interest rate 5.05% 5.82% 5.65% 5.38% 5.34% Variable interest rate borrowings 4,000 4,000 4,006 Average interest rate 7.43% 7.43% Total funds 176,760 25,054 21,834 2,086 20,156 134,511 380,401 384,113 Average interest rate 5.41% 5.45% 5.40% 5.17% 5.38% .73% 3.41%
YEAR 2000 Horizon began its Year 2000 (Y2K) planning and evaluation process in 1997 and developed a plan to address Y2K compliance. A project team was formed and began meeting in September 1997. The systems within Horizon have been reviewed and each system assigned a rating of mission critical or nonmission critical. (13) 15 Eight critical vendors were identified that provide hardware and software in order to operate the core data processing systems utilized by Horizon. The core data processing systems of the Bank and The Loan Store, and the machines on which they reside, were brought Y2K compliant and tested during the third quarter of 1998. The Y2K compliant version of the core data processing system of the Bank's wholly owned subsidiary IMS Investment Management, N.A. was received from the vendor in the third quarter of 1998 and will be installed and tested during the first quarter of 1999. The Y2K compliant version of the core data processing systems of Phoenix Insurance was received during the third quarter of 1998 and will be installed and tested during the first quarter of 1999. The Bank also utilizes four outside vendors to interface information into the core data processing systems. Two of these vendors have certified that they are Y2K compliant, one will be compliant by December 31, 1998, and one vendor was unable to become compliant on a timely basis. The Bank is converting to another vendor for this service as of January 1, 1999. The Bank's large loan customers have been contacted regarding their readiness of the Year 2000 to determine if Horizon has significant risk or exposure due to potential problems of customers related to the Year 2000. Information is being gathered on the majority of these customer and evaluated on an ongoing basis. These customers will be monitored on a consistent basis through the Year 2000. The costs associated with Y2K are anticipated to be approximately $280,000. This does not include upgrades to systems that would have been replaced in the normal upgrade processes. Approximately 70% of these costs have been incurred to date. The major risks of Horizon's Y2K issues are its ability to provide consistent daily processing of customer information and the soundness of Horizon's loan portfolio. Horizon is managing this risk by performing extensive analysis and testing to identify potential problem areas for its systems and throughout its customer base. In order to obtain assistance in this analysis, Horizon hired a consultant to perform an assessment report regarding Horizon's Y2K preparedness and testing strategies. Horizon's contingency plans consist primarily of manual processing of the core data in the event that the core data processing system is not operable during the effected time frames. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires companies to record derivatives on the balance sheet at their fair value. SFAS No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. - For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. - For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. (14) 16 - For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction. - For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119. SFAS No. 107 is amended to include the disclosure provisions about the concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of SFAS No. 133. SFAS No. 133 will be effective for all fiscal years beginning after June 15, 1999. Early application is encouraged; however, this Statement may not be applied retroactively to financial statements of prior periods. At this time, management is evaluating the statement to determine the impact, if any, it may have on the financial condition or results of operations of Horizon. FORWARD-LOOKING STATEMENTS Certain statements in this section constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. (15) 17 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands)
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 12,771 $ 19,506 Federal funds sold 18,500 Interest-bearing demand deposits 598 852 ------------------------------------ Cash and cash equivalents 31,869 20,358 Interest-bearing deposits 225 219 Investment securities Available for sale 54,612 45,015 Held to maturity (fair value of $12,090 and $11,756) 11,746 11,447 ------------------------------------ Total investment securities 66,358 56,462 Loans held for sale 2,119 Loans, net of allowance for loan losses of $2,787 and $2,702 287,559 255,413 Premises and equipment 18,393 16,144 Federal Reserve and Federal Home Loan Bank stock 3,973 3,623 Interest receivable 2,249 2,264 Other assets 5,528 3,149 ------------------------------------ Total assets $416,154 $359,751 ==================================== LIABILITIES Deposits Noninterest bearing $ 58,658 $ 61,474 Interest bearing 263,743 202,939 ------------------------------------ Total deposits 322,401 264,413 Short-term borrowings 4,000 16,000 Federal Home Loan Bank advances 54,000 42,000 Interest payable 817 674 Other liabilities 3,050 3,907 ------------------------------------ Total liabilities 384,268 326,994 ------------------------------------ COMMITMENTS AND CONTINGENCIES EQUITY RECEIVED FROM CONTRIBUTIONS AND DIVIDENDS TO THE ESOP 4,418 4,048 ------------------------------------ STOCKHOLDERS' EQUITY Common stock, $1 stated value Authorized -- 5,000,000 shares Issued -- 1,034,428 shares, less ESOP shares of 292,960 and 307,538 741 720 Additional paid-in capital 8,834 7,763 Retained earnings 24,201 24,355 Accumulated other comprehensive income 336 400 Less treasury stock, at cost, 183,048 and 146,263 shares (6,644) (4,529) ------------------------------------ Total stockholders' equity 27,468 28,709 ------------------------------------ Total liabilities and stockholders' equity $416,154 $359,751 ====================================
See notes to consolidated financial statements. (16) 18 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Dollar Amounts in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable $24,100 $24,574 $ 23,096 Investment securities Taxable 4,012 4,256 4,682 Tax exempt 447 435 455 ----------------------------------------------------- Total interest income 28,559 29,265 28,233 ----------------------------------------------------- INTEREST EXPENSE Deposits 10,578 10,343 9,605 Federal funds purchased and short-term borrowings 295 110 714 Federal Home Loan Bank advances 2,658 2,484 1,481 ----------------------------------------------------- Total interest expense 13,531 12,937 11,800 ----------------------------------------------------- NET INTEREST INCOME 15,028 16,328 16,433 Provision for loan losses 1,000 1,325 66 ----------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,028 15,003 16,367 ----------------------------------------------------- OTHER INCOME Service charges on deposit accounts 2,255 2,020 1,573 Fiduciary activities 2,141 2,423 2,094 Gain on sale of other real estate owned 9 1,609 Commission income from insurance agency 462 Income from reinsurance company 158 221 156 Other income 437 246 253 ----------------------------------------------------- Total other income 5,453 4,919 5,685 ----------------------------------------------------- OTHER EXPENSES Salaries and employee benefits 9,439 8,316 8,671 Net occupancy expenses 1,426 1,346 1,164 Data processing and equipment expenses 2,132 2,504 2,108 Loss on disposal of fixed assets 26 274 Loss on other real estate owned 18 55 Other expenses 5,030 5,159 4,631 ----------------------------------------------------- Total other expenses 18,053 17,617 16,629 ----------------------------------------------------- INCOME BEFORE INCOME TAX 1,428 2,305 5,423 Income tax expense 345 584 1,599 ----------------------------------------------------- NET INCOME $ 1,083 $ 1,721 $ 3,824 ===================================================== BASIC AND DILUTED EARNINGS PER SHARE $ 1.58 $ 2.42 $ 5.19 =====================================================
See notes to consolidated financial statements. (17) 19 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Table Dollar Amounts in Thousands)
ACCUMULATED OTHER COMMON ADDITIONAL COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY STOCK PAID-IN CAPITAL INCOME EARNINGS INCOME STOCK TOTAL - ------------------------------------------------------------------------------------------------------------------------------ BALANCES, JANUARY 1, 1996 $732 $9,238 $21,105 $466 $(2,988) $28,553 Net income $3,824 3,824 3,824 Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment (381) (381) (381) -------------- Comprehensive income $3,443 ============== 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 ------------------------- ----------------------------------------------------- BALANCES, DECEMBER 31, 1996 708 7,962 23,898 85 (3,356) 29,297 Net income $1,721 1,721 1,721 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment 315 315 315 -------------- Comprehensive income $2,036 ============== 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 ------------------------- ----------------------------------------------------- BALANCES, DECEMBER 31, 1997 720 7,763 24,355 400 (4,529) 28,709 Net income $1,083 1,083 1,083 Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment (64) (64) (64) -------------- Comprehensive income $1,019 ============== Cash dividends ($1.80 per share) (1,237) (1,237) Purchase of 36,785 shares of treasury stock (2,115) (2,115) Issuance of 6,897 shares of common stock for purchase of insurance agency 7 379 386 Net purchases and distributions with ESOP 14 627 641 Tax benefit of ESOP dividend deduction 65 65 ------------------------- ----------------------------------------------------- BALANCES, DECEMBER 31, 1998 $741 $8,834 $24,201 $336 $(6,644) $27,468 ========================= =====================================================
See notes to consolidated financial statements. (18) 20 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollar Amounts in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,083 $ 1,721 $ 3,824 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 1,000 1,325 66 Additional paid-in capital from release of ESOP shares 360 184 91 Depreciation and amortization 1,162 1,370 1,040 Deferred income tax 392 (29) 357 Investment securities amortization, net 199 158 312 Investment securities gains (9) (Gain) loss on disposal of fixed assets 13 274 (2) Gain on sale of loans (56) (Gain) loss on sale of other real estate owned 9 (1,554) Deferred loan fees (84) (57) (52) Unearned income (61) 54 51 Net change in Interest receivable 15 (48) 684 Interest payable 143 84 23 Other assets (758) (576) 2,978 Other liabilities (857) (504) 1,289 ----------------------------------------------------- Net cash provided by operating activities 2,607 3,900 9,107 ------------------------------------------------------ INVESTING ACTIVITIES Net change in interest-bearing deposits (6) (8) (5) Purchases of securities available for sale (27,839) (1,000) (2,963) Proceeds from maturities, calls, and principal repayments of securities available for sale 17,868 11,662 17,969 Proceeds from sales of securities available for sale 1,009 Purchases of securities held to maturity (2,597) (1,962) (6,217) Proceeds from maturities, calls, and principal repayments of securities held to maturity 2,282 3,315 5,555 Net change in loans (34,048) (4,766) (37,452) Purchase of loans (1,379) (344) Proceeds from sales of loans 2,765 17,039 6,392 Recoveries on loans previously charged-off 401 383 149 Purchase of insurance agency (785) Purchases of premises and equipment (3,423) (3,735) (4,064) Purchase of Federal Reserve and Federal Home Loan Bank stock (350) (887) (30) ----------------------------------------------------- Net cash provided (used) by investing activities (45,732) 19,671 (21,010) ------------------------------------------------------
(19) 21 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollar Amounts in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- (Continued) FINANCING ACTIVITIES Net change in Deposits $57,988 $(24,767) $ 196 Short-term borrowings (12,000) 3,151 (8,720) Federal Home Loan Bank advances 70,000 31,000 33,000 Repayment of Federal Home Loan Bank advances (58,000) (30,500) (11,900) Dividends paid (1,237) (1,264) (1,031) Purchase of treasury stock (2,115) (1,173) (368) ----------------------------------------------------- Net cash provided (used) by financing activities 54,636 (23,553) 10,177 ------------------------------------------------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 11,511 18 (1,726) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,358 20,340 22,066 ------------------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $31,869 $ 20,358 $20,340 ====================================================== ADDITIONAL CASH FLOWS INFORMATION Interest paid $13,388 $10,427 $11,823 Income tax paid 440 661 1,714
See notes to consolidated financial statements. (20) 22 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS -- The consolidated financial statements of Horizon Bancorp (Horizon) and its wholly owned subsidiaries, Horizon Bank, N.A. (Bank), HBC Insurance Group, Inc. (Insurance Company), and The Loan Store, Inc. conform to generally accepted accounting principles and reporting practices followed by the banking industry. The Bank is a full-service commercial bank offering a broad range of commercial and retail banking and other services incident to banking. The Bank has two wholly-owned subsidiaries: IMS Investment Management, Inc. (IMS) and Phoenix Insurance Services, Inc (Insurance Agency). IMS offers corporate and individual trust and agency services and investment management services. The Insurance Agency offers a full line of commercial and personal insurance products. The Bank maintains four facilities in LaPorte County, Indiana and four facilities in Porter County, Indiana. The Insurance Company offers credit insurance. The net income generated from the insurance operations is not significant to the overall operations of Horizon. The Loan Store, Inc. is engaged in the business of retail lending and operates in 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 material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES -- 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 at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES AVAILABLE FOR SALE -- Horizon and 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 are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method. 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. (21) 23 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) INTEREST AND FEES ON LOANS -- Interest on commercial, mortgage, and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured and it is in the process of collection, or when serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. CONCENTRATIONS OF CREDIT RISK -- The Bank grants commercial, real estate, and consumer loans to customers located primarily in LaPorte County and portions of Porter County in Northwest Indiana. Commercial loans make up approximately 26% of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flow from operations of the businesses. Real estate loans make up approximately 52% of the loan portfolio and are secured by both commercial and residential real estate. Installment loans make up approximately 21% 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 provisions may be either greater than or less than actual net charge-offs. While the largest portion of this reserve is intended to cover loan losses, it is considered a general reserve for all credit-related purposes. LOAN IMPAIRMENT -- When analysis determines a borrower's operating results and financial condition are not adequate to meet debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are also often considered impaired. Impaired loans, or portions thereof are charged-off when deemed uncollectible. This typically occurs when the loan is 120 or more days past due. Loans are considered impaired if full principal or interest payments are not made in accordance with the original terms of the loan. Impaired loans are measured and carried at the lower of cost or the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Smaller balance homogenous loans are evaluated for impairment in aggregate. Such loans include residential first mortgage loans secured by one to four family residences, residential construction loans and automobile, home equity, and second mortgages. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. 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. FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK -- The stock is a required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula. (22) 24 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) 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 $133,000 and $125,000 at December 31, 1998 and 1997. SERVICING RIGHTS -- Prior to adopting Statement of Financial Accounting Standards (SFAS) 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 revenue. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. INTANGIBLE ASSETS -- Intangible assets are being amortized on the straight-line basis over a 15-year period. Such assets are periodically evaluated as to the recoverability of their carrying value. TREASURY STOCK -- Treasury stock is stated at cost. STOCK OPTIONS -- Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Bank accounts for and will continue to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants. INCOME TAXES -- Horizon files annual consolidated income tax returns with its subsidiaries. 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 sheet 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 January 1, 1998, Horizon adopted SFAS No. 128, Earnings Per Share. SFAS No. 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 No. 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 No. 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 dilutive instruments. The number of shares used in the computation of basic earnings per share is 686,804 for 1998, 710,967 for 1997, and 736,887 for 1996. (23) 25 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) DIVIDEND RESTRICTIONS -- Regulations of the Comptroller of the Currency limit the amount of dividends that may be paid by a national bank to its parent holding company without prior approval of the Comptroller of the Currency. According to these regulations, as of December 31, 1998, no additional dividends may be paid by the 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 one 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 1997 and 1996 financial statements to be comparable to 1998. NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair value amounts were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgement was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the derived estimated fair value amounts. The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon's significant financial instruments at December 31, 1998 and 1997. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities which are not financial instruments as defined by SFAS No. 107 Disclosures about Fair Value of Financial Instruments, such as the value of real property, the value of core deposit intangibles, the value of mortgage servicing rights, nor the value of anticipated future business. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS -- The carrying amounts approximate fair value. INTEREST-BEARING DEPOSITS -- The carrying amounts approximate fair value. INVESTMENT SECURITIES -- For debt and marketable equity securities available for sale and held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities. (24) 26 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) 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. FHLB AND FRB STOCK -- Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB. DEPOSITS -- The fair value of demand deposits, savings accounts, interest-bearing checking accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity. SHORT-TERM BORROWINGS -- The carrying amounts approximate fair value. FEDERAL HOME LOAN BANK ADVANCES -- Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing advances. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTER OF CREDIT -- The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value. The estimated fair values of Horizon's financial instruments are as follows:
1998 1997 ----------------------------------------------------------------------- CARRYING FAIR Carrying Fair DECEMBER 31 AMOUNT VALUE Amount Value - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 31,869 $ 31,869 $ 20,358 $ 20,358 Interest-bearing deposits 225 225 219 219 Investment securities available for sale 54,612 54,612 45,015 45,015 Investment securities held to maturity 11,746 12,090 11,447 11,756 Loans including loans held for sale, net 287,559 287,277 257,532 256,278 Interest receivable 2,249 2,249 2,264 2,264 Stock in FHLB and FRB 3,973 3,973 3,623 3,623 LIABILITIES Noninterest-bearing deposits 58,658 58,658 61,474 61,474 Interest-bearing deposits 263,743 267,417 202,939 207,986 Short-term borrowings 4,000 4,006 16,000 16,005 Federal Home Loan Bank advances 54,000 54,032 42,000 42,060 Interest payable 817 817 674 674
(25) 27 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 3--INVESTMENT SECURITIES
1998 ----------------------------------------------------------------------- GROSS UNREALIZED GROSS UNREALIZED AMORTIZED COST GAINS LOSSES FAIR DECEMBER 31 VALUE - ---------------------------------------------------------------------------------------------------------------------------- Available for sale U.S. Treasury and federal agencies $ 12,568 $ 93 $ 16 $ 12,645 GNMA mortgage-backed securities 12,321 72 79 12,314 FHLMC mortgage-backed securities 9,117 220 4 9,333 FNMA mortgage-backed securities 19,729 217 3 19,943 Marketable equity securities 316 61 377 ----------------------------------------------------------------------- Total available for sale 54,051 663 102 54,612 ----------------------------------------------------------------------- Held to maturity Federal agencies 1,630 62 1,692 State and municipal 10,116 287 5 10,398 ----------------------------------------------------------------------- Total held to maturity 11,746 349 5 12,090 ----------------------------------------------------------------------- Total investment securities $ 65,797 $1,012 $ 107 $ 66,702 ======================================================================= 1997 ----------------------------------------------------------------------- GROSS UNREALIZED GROSS UNREALIZED AMORTIZED COST GAINS LOSSES FAIR DECEMBER 31 VALUE - ---------------------------------------------------------------------------------------------------------------------------- Available for sale U.S. Treasury and federal agencies $ 3,965 $ 60 $ 4,025 GNMA mortgage-backed securities 6,048 140 6,188 FHLMC mortgage-backed securities 13,126 244 13,370 FNMA mortgage-backed securities 20,811 229 21,040 Marketable equity securities 397 $5 392 ----------------------------------------------------------------------- Total available for sale 44,347 673 5 45,015 ----------------------------------------------------------------------- Held to maturity Federal agencies 2,040 104 2,144 State and municipal 9,407 205 9,612 ----------------------------------------------------------------------- Total held to maturity 11,447 309 11,756 ----------------------------------------------------------------------- Total investment securities $ 55,794 $ 982 $5 $ 56,771 =======================================================================
(26) 28 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) The amortized cost and fair value of securities held to maturity and available for sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
HELD TO MATURITY AVAILABLE FOR SALE ----------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR AMOUNT VALUE COST VALUE - ---------------------------------------------------------------------------------------------------------------------------- Within one year $ 685 $ 686 $ 147 $ 147 One to five years 2,802 2,862 6,171 6,240 Five to ten years 6,186 6,429 4,250 4,273 After ten years 2,073 2,113 2,000 1,985 ----------------------------------------------------------------------- 11,746 12,090 12,568 12,645 Mortgage-backed securities 41,167 41,590 Marketable equity securities 316 377 ----------------------------------------------------------------------- Totals $11,746 $12,090 $54,051 $54,612 =======================================================================
Securities with a carrying value of $4,079,000 and $16,806,000 were pledged at December 31, 1998 and 1997 to secure certain public and trust deposits. There were no sales of securities available for sale during 1998. Proceeds from sales of securities available for sale during 1997 were $1,009,000. Gross gains of $9,000 were realized on these sales. There were no losses. During 1996, there were no sales of securities available for sale. There were no sales of securities held to maturity during 1998, 1997, or 1996. At December 31, 1998 and 1997 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. NOTE 4--LOANS AND ALLOWANCE
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Commercial loans $ 76,682 $ 73,177 Real estate loans 152,390 120,345 Installment loans 61,274 64,593 ------------------------------------ Total loans $290,346 $258,115 ====================================
Loans to directors and executive officers of Horizon and the Bank, including associates of such persons, amounted to $4,819,000 and $3,538,000, as of December 31, 1998 and 1997. During 1998, new loans or advances were $3,795,000 and loan payments were $2,514,000. (27) 29 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $2,702 $2,435 $2,777 Provision for losses 1,000 1,325 66 Recoveries on loans 401 383 149 Loans charged off (1,316) (1,441) (557) ---------------------------------------------------- Balances, December 31 $2,787 $2,702 $2,435 ====================================================
At December 31, 1998 and 1997, loans past due more than 90 days and still accruing interest totaled approximately $830,000 and $862,000. Loans on which the recognition of interest has been discontinued or reduced totaled approximately $64,000, $319,000, and $316,000 at December 31, 1998, 1997, and 1996. Interest income not recognized on these loans totaled approximately $7,000, $32,000, and $36,000 in 1998, 1997, and 1996. NOTE 5--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 in the consolidated balance sheet.
DECEMBER 31 1998 1997 1997 - ---------------------------------------------------------------------------------------------------------------------------- Allowance for other real estate owned Balances, January 1 $0 $151 $1,075 Sale of other real estate owned (151) (924) ---------------------------------------------------- Balances, December 31 $0 $ 0 $ 151 ====================================================
NOTE 6--PREMISES AND EQUIPMENT
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Land $ 3,255 $ 2,838 Buildings and improvements 16,467 12,689 Furniture and equipment 7,947 8,878 ------------------------------------ Total cost 27,669 24,405 Accumulated depreciation (9,276) (8,261) ------------------------------------ Net $18,393 $16,144 ====================================
(28) 30 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Depreciation expense for the years ended December 31, 1998, 1997, and 1996 totaled $1,162,000, $1,370,000, and $1,040,000. At December 31, 1998 the Bank had commitments totaling approximately $1,100,000 relating to future construction costs of a new branch in Valparaiso, Indiana. NOTE 7--LEASES Horizon has several operating leases for premises and equipment that expire through 2003. These leases generally contain renewal options and require Horizon to pay all executory costs such as taxes, maintenance, and insurance. Rental expense for these leases amounted to $352,000, $291,000, and $317,000 for the years ended December 31, 1998, 1997, and 1996. Future minimum lease payments under operating leases are:
YEARS ENDING DECEMBER 31 - ----------------------------------------------------------------------------------------------------------- 1999 $200 2000 100 2001 81 2002 29 2003 7 ------------------- Total minimum lease payments $417 ===================
NOTE 8--DEPOSITS
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest bearing demand deposits $ 58,658 $ 61,474 Interest bearing demand deposits 32,572 16,605 Money market (variable rate) 3,985 5,817 Savings deposits 41,692 48,714 Certificates of $100,000 or more 57,235 19,558 Other certificates and time deposits 128,259 112,245 ------------------------------------ Total deposits $322,401 $264,413 ====================================
Interest expense on time certificates of $100,000 or more was approximately $2,937,000, $2,591,000, and $2,001,000 for 1998, 1997, and 1996, respectively. (29) 31 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Certificates and other time deposits maturing in years ending December 31 are as follows:
1999 $151,390 2000 20,370 2001 11,492 2002 2,086 2003 156 ------------------- $185,494 =================== Certificates of deposit of $100,000 or more by remaining maturity as of December 31, 1998 are as follows: Due in three months or less $39,707 Due after three months through six months 6,245 Due after six months through one year 7,925 Due after one year 3,358 ------------------- $57,235 ===================
NOTE 9--SHORT-TERM BORROWINGS
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Federal funds purchased $15,000 Notes payable, unsecured $4,000 1,000 ------------------------------------ Total short-term borrowings $4,000 $16,000 ==================================== The Loan Store has an unsecured $10,000,000 line of credit, of which $4,000,000 was outstanding at December 31, 1998. The loan is from an unrelated financial institution with interest payable monthly at LIBOR plus 2%. The note matures within one year and is guaranteed by Horizon. At December 31, 1998, the Bank has available approximately $42,500,000 in credit lines with various money center banks. NOTE 10--FHLB ADVANCES DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank advances, variable and fixed rates, due at various dates through June 17, 2008 $54,000 $42,000 ====================================
The Federal Home Loan Bank advances are secured by first-mortgage loans and investment securities totaling approximately $178,221,000. Advances are subject to restrictions or penalties in the event of prepayment. (30) 32 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Contractual maturities in years ending December 31
1999 $15,000 2000 4,000 2001 10,000 2003 20,000 Thereafter 5,000 ------------------- $54,000 ===================
NOTE 11--LOAN SERVICING Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of loans serviced for others totaled approximately $23,010,000 and $31,569,000 at December 31, 1998 and 1997. NOTE 12--EMPLOYEE STOCK OWNERSHIP 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. In early 1993, the Compensation Committee of the Board initially discussed the continuation of Horizon's ESOP. In August 1993, the Board of Directors approved the continuation of this plan and authorized the transfer of 172,414 shares of Horizon's stock into the ESOP for future allocation to employee retirement accounts. 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. Under Statement of Position (SOP) 93-6, Employers Accounting for Employee Stock Ownership Plans issued by 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. Transactions affecting ESOP expense and cash contributions to the ESOP are as follows:
DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Dividends paid on unallocated ESOP shares $329 $340 $408 Market value increase of shares released 360 184 91 Other contributions 139 86 ----------------------------------------------------- Total ESOP expense included in salaries and benefits $828 $524 $585 ===================================================== Total cash contributions made to ESOP during the year $140 $ 0 $ 86 =====================================================
(31) 33 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) As of December 31, 1998, Horizon had seven loans outstanding with the ESOP with remaining balances totaling $5,769,000. These loans were utilized to repurchase Horizon common shares from retiring employees, eligible employees electing to diversify portions of their ESOP accounts, and from other shareholders. Collateral for these loans is 171,403 shares of Horizon common stock. These loans do not bear any interest and mature within 15 to 20 years. Below are the transactions affecting the ESOP equity accounts:
UNALLOCATED ADDITIONAL ESOP COMMON STOCK PAID-IN CAPITAL SHARES TOTAL -------------------------------------------------------------------- Balance, January 1, 1996 $295 $8,277 $(4,754) $3,818 Market value increase in ESOP shares released 91 91 Loan repayments 513 513 Net ESOP share purchases and distributions 24 1,339 1,363 Loan to fund ESOP share repurchases (1,574) (1,574) -------------------------------------------------------------------- Balance, December 31, 1996 319 9,707 (5,815) 4,211 Market value increase in ESOP shares released 184 184 Loan repayments 250 250 Net ESOP share purchases and distributions (12) 270 258 Loan to fund ESOP share repurchases (855) (855) -------------------------------------------------------------------- Balance, December 31, 1997 307 10,161 (6,420) 4,048 Market value increase in ESOP shares released 360 360 Loan repayments 651 651 Net ESOP share purchases and distributions (14) (627) (641) -------------------------------------------------------------------- Balance, December 31, 1998 $293 $9,894 $(5,769) $4,418 ====================================================================
NOTE 13--EMPLOYEE THRIFT PLAN The Employee Thrift Plan (Plan) provides that all employees of the Bank with the requisite hours of service are eligible for the Plan. The 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 the Bank contributions are fully vested after six years. The Bank's 1998, 1997, and 1996 expense related to the thrift plan totaled $184,000, $189,000, and $203,000. (32) 34 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 14--OTHER EXPENSES
YEAR ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Supplies and printing $ 355 $ 504 $ 309 Advertising 506 762 489 Communication 644 606 492 Professional fees 755 508 516 Training 110 278 251 Outside services and consultants 657 796 642 Reinsurance company 104 129 161 Loan expenses 278 174 245 Goodwill amortization 45 Directors fees 258 200 152 Insurance expense 212 137 108 Other 1,106 1,065 1,266 ----------------------------------------------------- Total other expenses $5,030 $5,159 $4,631 ===================================================== NOTE 15--INCOME TAX YEAR ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Income tax expense Currently payable Federal $ (45) $ 402 $ 886 State (2) 211 356 Deferred 392 (29) 357 ----------------------------------------------------- Total income tax expense $ 345 $ 584 $ 1,599 ===================================================== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 485 $ 784 $1,843 Tax exempt interest (358) (271) (300) Nondeductible and other (79) (110) (285) Effect of state income taxes 97 181 341 Increase in valuation allowance 200 ----------------------------------------------------- Actual tax expense $ 345 $ 584 $1,599 =====================================================
(33) 35 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows:
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Allowance for loan losses $ 176 $140 Accrued operating expenses 152 91 Loan fees 103 139 Alternative minimum tax carryforward 329 105 Other 416 453 ------------------------------------ Total assets 1,176 928 ------------------------------------ LIABILITIES Depreciation (500) (61) Accretion of investment discounts (5) (4) Unrealized gain on securities available for sale (222) (268) ------------------------------------ Total liabilities (727) (333) ------------------------------------ VALUATION ALLOWANCE (200) ------------------------------------ Net deferred tax asset $ 249 $595 ====================================
The valuation allowance at December 31, 1998 is $200,000 all of which arose during the current year. Horizon has consolidated federal alternative minimum tax (AMT) credit carryovers of approximately $329,000 which are available to reduce future federal income taxes. The AMT credits can be carried forward indefinitely. NOTE 16--EARNINGS PER SHARE Earnings per share (EPS) were computed as follows:
1998 ----------------------------------------------------- WEIGHTED AVERAGE PER-SHARE YEAR ENDED DECEMBER 31 INCOME SHARES AMOUNT - --------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common stockholders $1,083 687 $1.58 EFFECT OF DILUTIVE SECURITIES Stock options ----------------------------------------------------- DILUTED EARNINGS PER SHARE Income available to common stockholders and assumed conversions $1,083 687 $1.58 =====================================================
(34) 36 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
1997 ----------------------------------------------------- WEIGHTED AVERAGE YEAR ENDED DECEMBER 31 INCOME SHARES PER-SHARE AMOUNT - --------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common stockholders $1,721 711 $2.42 EFFECT OF DILUTIVE SECURITIES Stock options ----------------------------------------------------- DILUTED EARNINGS PER SHARE Income available to common stockholders and assumed conversions $1,721 711 $2.42 ===================================================== 1996 ----------------------------------------------------- WEIGHTED AVERAGE PER-SHARE YEAR ENDED DECEMBER 31 INCOME SHARES AMOUNT - --------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common stockholders $3,824 737 $5.19 EFFECT OF DILUTIVE SECURITIES Stock options ----------------------------------------------------- DILUTED EARNINGS PER SHARE Income available to common stockholders and assumed conversions $3,824 737 $5.19 ===================================================== Options to purchase 29,100 shares of common stock at prices ranging from $13.50 to $60.00 per share were outstanding at December 31, 1998. At December 31, 1997 and 1996, options to purchase 51,800 and 79,750 shares of common stock at prices ranging from $13.50 to $31.50 were outstanding. The options were not included in the computation of diluted EPS because the contracts may be settled in common stock or in cash at the election of the option holder. Historically, all contracts have been settled in cash and it is anticipated that the exercise of future contracts will also be settled in cash. NOTE 17--OTHER COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year $ (106) $531 $(631) Less: reclassification adjustment for gains (losses) realized in net income 9 ----------------------------------------------------- Net unrealized gains (losses) (106) 522 (631) Tax (expense) benefit 42 (207) 250 ----------------------------------------------------- Other comprehensive income $ (64) $315 $(381) =====================================================
(35) 37 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 18 --COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES Because of the nature of activities, Horizon is subject to pending and threatened legal actions that arise in the normal course of business. In management's opinion, after consultation with counsel, none of the litigation to which Horizon or any of its subsidiaries is a party will have a material effect on the consolidated financial position or results of operations of Horizon. The Bank was required to have approximately $3,720,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 1998. These balances are included in cash and cash equivalents and do not earn interest. The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements. As of December 31, 1998 and 1997, commitments to make loans amounted to approximately $52,171,000 and $45,026,000. As of December 31, 1998 and 1997, commitments under outstanding standby letters of credit amounted to approximately $854,000 and $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. NOTE 19 --YEAR 2000 Like all entities, Horizon and its subsidiaries are exposed to risks associated with the Year 2000 Issue, which affects computer software and hardware; transactions with customers, vendors, and other entities; and equipment dependent upon microchips. Horizon and subsidiaries have begun, but not yet completed, the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with which Horizon and subsidiaries do business. If remediation efforts of Horizon or third parties with which the company and subsidiaries do business are not successful, the Year 2000 Issue could have negative effects on Horizon's financial condition and results of operations in the near term. Horizon has estimated the ultimate cost of addressing the Year 2000 Issue to be approximately $280,000. (36) 38 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 20 --REGULATORY CAPITAL Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier I capital, and Tier I leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 1998 and 1997, Horizon and its Bank are categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 1998 that management believes have changed Horizon's or the Bank's classification. Horizon's and Bank's actual and required capital amounts (in millions) and ratios are as follows:
MINIMUM REQUIRED MINIMUM TO BE WELL REQUIRED FOR CAPITALIZED(1) UNDER CAPITAL(1) ADEQUACY PROMPT CORRECTIVE ACTION ACTUAL PURPOSES REQUIREMENTS --------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1998 Total capital(1) (to risk-weighted assets) Consolidated $32.8 10.73% $24.4 8.00% N/A N/A Bank 28.8 11.57 19.9 8.00 24.9 10.00 Tier I capital(1) (to risk-weighted assets) Consolidated 30.0 9.82 12.2 4.00 N/A N/A Bank 26.0 10.46 10.0 4.00 14.9 6.00 Tier I capital(1) (to average assets) Consolidated 30.0 7.53 15.9 4.00 N/A N/A Bank 26.0 6.63 15.7 4.00 19.6 5.00
(37) 39 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
MINIMUM REQUIRED TO BE WELL MINIMUM CAPITALIZED(1) UNDER REQUIRED FOR PROMPT CORRECTIVE CAPITAL(1) ADEQUACY ACTION ACTUAL PURPOSES REQUIREMENTS --------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1997 Total capital(1) (to risk-weighted assets) Consolidated $35.0 12.50% $22.3 8.00% N/A N/A Bank 30.6 13.20 18.6 8.00 23.2 10.00 Tier I capital(1) (to risk-weighted assets) Consolidated 32.3 11.60 11.2 4.00 N/A N/A Bank 28.0 12.10 9.3 4.00 13.9 6.00 Tier I capital(1) (to average assets) Consolidated 32.3 8.80 14.7 4.00 N/A N/A Bank 28.0 8.00 14.5 4.00 18.2 5.00 (1) As defined by regulatory agencies
NOTE 21 --STOCK OPTIONS Horizon maintains the 1987 Nonqualified Stock Option and Stock Appreciation Right Plan (1987 Plan) under which options and stock appreciation rights (SARs) were granted to certain officers and employees. SARs entitle eligible employees to receive cash, stock or a combination of cash and stock totaling the excess, on the date of exercise, of the fair market value of the shares of common stock covered by the option over the option exercise price. The underlying stock options are deemed to have been exercised upon exercise of the SARs. No options remain available for grant at December 31, 1998 and 1997, however, outstanding options may be exercised 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 $0 for 1998, $677,000 for 1997, and $814,000 for 1996. (38) 40 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) A summary of transactions for the plan follows:
SHARES -------------------------------------- WEIGHTED- AVAILABLE FOR OPTIONS AVERAGE EXERCISE GRANT OUTSTANDING PRICE --------------------------------------------------------- Balance, January 1, 1996 0 82,750 $26.39 Exercised (3,000) 31.50 --------------------------------------------------------- Balance, December 31, 1996 0 79,750 26.20 Exercised (27,950) 22.90 --------------------------------------------------------- Balance, December 31, 1997 0 51,800 27.98 Exercised (34,700) 28.77 ========================================================= Balance, December 31, 1998 0 17,100 $26.37 =========================================================
As of December 31, 1998, the 17,100 options outstanding have exercise prices ranging from $13.50 to $31.50 and a weighted-average remaining contractual life of 9.4 years. The options granted under the 1987 plan are fully vested. Under Horizon's 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan), which is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, Horizon may grant certain officers and employees stock option awards or stock appreciation rights which vest and become fully exercisable at the end of five years of continued employment. SARs entitle eligible employees to receive cash, stock or a combination of cash and stock totaling the excess, on the date of exercise, of the fair market value of the shares of common stock covered by the option over the option exercise price. The underlying stock options are deemed to have been exercised upon exercise of the SARs. During 1998, Horizon authorized the grant of options and SARs for 22,000 shares of common stock. A summary of transactions for the plan follows:
SHARES -------------------------------------- WEIGHTED- AVAILABLE FOR OPTIONS AVERAGE EXERCISE GRANT OUTSTANDING PRICE --------------------------------------------------------- Balance, January 1, 1998 90,000 Granted (22,000) 22,000 $60.00 Forfeitures (10,000) 60.00 ====================================== Balance, December 31, 1998 68,000 12,000 $60.00 ======================================
As of December 31, 1998, the 12,000 options outstanding have an exercise price of $60.00 and a weighted average remaining contractual life of 19.5 years. The options granted under the 1997 plan vest at a rate of 20% per year. (39) 41 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 22 --CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp: CONDENSED BALANCE SHEET
DECEMBER 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Total cash and cash equivalents $ 2,007 $ 864 Investment in Bank 27,446 28,412 Investment in Insurance Company 280 226 Investment in The Loan Store 486 657 Investment securities, net 377 401 Accrued interest receivable 12 Dividends receivable from Bank 550 500 Other assets 1,545 4,147 ------------------------------------ Total assets $32,703 $35,207 ==================================== LIABILITIES Other liabilities $ 817 $ 2,450 EQUITY RECEIVABLE FROM CONTRIBUTIONS AND DIVIDENDS TO ESOP 4,418 4,048 STOCKHOLDERS' EQUITY 27,468 28,709 ------------------------------------ Total liabilities and stockholders' equity $32,703 $35,207 ====================================
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (EXPENSE) Dividend income from Bank $3,000 $3,000 $3,600 Investment income 47 139 123 Other income 15 21 23 Employee benefit expense (749) (506) (615) Other expense (158) (155) (238) ----------------------------------------------------- INCOME BEFORE DISTRIBUTED INCOME OF SUBSIDIARIES 2,155 2,499 2,893 UNDISTRIBUTED INCOME OF SUBSIDIARIES (1,372) (913) 265 ----------------------------------------------------- INCOME BEFORE TAX 783 1,586 3,158 INCOME TAX BENEFIT 300 135 666 ===================================================== NET INCOME $1,083 $1,721 $3,824 =====================================================
(40) 42 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $1,083 $1,721 $3,824 Adjustments to reconcile net income to net cash provided by operating activities Distributions In excess of (equity in undistributed) net income of Bank 1,255 691 (341) Distributions in excess of (equity in undistributed) net income of Insurance Company (54) (54) 11 Distributions in excess of (equity in undistributed) net income of The Loan Store 171 276 65 Additional paid-in capital from release of ESOP shares 360 184 244 Gain on sale of securities (10) Accretion (82) (12) Change in Income taxes receivable (133) (385) (387) Interest receivable (12) 20 (4) Dividends receivable from Bank (50) 500 (600) Other assets 3,508 (614) (2,127) Other liabilities (1,633) (158) 751 ---------------------------------------------------- Net cash provided by operating activities 4,495 2,089 1,424 ---------------------------------------------------- INVESTING ACTIVITIES Sales of investment securities 1,000 Investment in The Loan Store (500) Principal repayment of investment 26 ---------------------------------------------------- Net cash provided by investing activities 500 26 ---------------------------------------------------- FINANCING ACTIVITIES Dividends paid (1,237) (1,264) (1,031) Purchase of treasury stock (2,115) (1,173) (368) ---------------------------------------------------- Net cash used by financing activities (3,352) (2,437) (1,399) ---------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,143 152 51 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 864 712 661 ---------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $2,007 $ 864 $ 712 ====================================================
(41) 43 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 23 --SEGMENT INFORMATION Horizon's reportable segments are determined by the products and services offered, primarily distinguished between banking and trust and investment management operations. Loans, investments, and deposits provide the revenue in the banking operation, and fees provide the revenue in the trust and investment management operation. All operations are domestic. The accounting policies used are the same as those described in the summary of significant accounting policies. Occupancy expenses and indirect expenses are not allocated. Income taxes are allocated to each entity based on pretax income. Transactions among segments are recorded at fair value. Segments are evaluated based upon net income. Information reported internally for performance assessment follows:
1998 ----------------------------------------------------------------------- TRUST AND INVESTMENT CONSOLIDATED BANKING MANAGEMENT OTHER TOTALS ----------------------------------------------------------------------- Net interest income $ 14,421 $ 64 $ 543 $ 15,028 Provision for loan losses 820 180 1,000 Trust and investment management fees 2,141 2,141 Other income 2,646 666 3,312 Total other expenses 14,410 1,397 2,246 18,053 Income tax expense 478 316 (449) 345 Segment profit 1,358 482 (757) 1,083 Segment assets 378,624 1,000 36,530 416,154 1997 ----------------------------------------------------------------------- TRUST AND INVESTMENT CONSOLIDATED BANKING MANAGEMENT OTHER TOTALS ----------------------------------------------------------------------- Net interest income $ 15,862 $ 59 $ 407 $ 16,328 Provision for loan losses 1,255 70 1,325 Trust and investment management fees 2,423 2,423 Other income 2,182 314 2,496 Total other expenses 14,161 1,359 2,097 17,617 Income tax expense 385 382 (183) 584 Segment profit 2,243 741 (1,263) 1,721 Segment assets 355,448 1,000 38,943 395,391
(42) 44 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
1996 ----------------------------------------------------------------------- TRUST AND INVESTMENT CONSOLIDATED BANKING MANAGEMENT OTHER TOTALS ----------------------------------------------------------------------- Net interest income $ 16,206 $ 227 $ 16,433 Provision for loan losses 66 66 Trust and investment management fees $2,094 2,094 Other income 3,412 179 3,591 Total other expenses 13,434 1,219 1,976 16,629 Income tax expense 2,035 298 (734) 1,599 Segment profit 4,149 577 (902) 3,824 Segment assets 377,516 1,000 37,358 415,874 Amounts included in other column are as follows:
1998 1997 1996 ----------------------------------------------------- Net interest income Holding company interest income $ 32 $ 139 $ 123 Nonreportable subsidiaries net interest income 511 268 104 Provision for loan losses Nonreportable subsidiaries provision for loan losses 180 70 66 Other income Holding company interest nonincome 55 21 23 Nonreportable subsidiaries noninterest income 611 293 156 Other expense Holding company noninterest expense 1,011 1,338 1,638 Nonreportable subsidiaries noninterest expense 1,235 759 338 Income tax (benefit) expense Holding company (benefit) expense (273) (136) (666) Nonreportable subsidiaries (benefit) expense (176) (47) (68) Segment profits Holding company profits (losses) (651) (1,042) (826) Nonreportable subsidiaries profits (losses) (106) (221) (76) Segment assets Holding company assets 30,789 34,543 35,672 Nonreportable subsidiaries assets 5,741 4,400 1,686
(43) 45 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Reportable segment totals are reconciled to the financial statements as follows:
1998 ------------------------------------------------------------------------- REPORTABLE INTERSEGMENT CONSOLIDATED SEGMENTS OTHER ELIMINATION TOTALS ------------------------------------------------------------------------- Net interest income $ 14,485 $ 543 $ 15,028 Provision for loan losses 820 180 1,000 Trust and investment management fees 2,141 2,141 Other income 2,646 666 3,312 Total other expenses 15,807 2,246 18,053 Income tax expense 794 (449) 345 Segment profit 1,851 (768) 1,083 Segment assets 407,836 36,530 $(28,212) 416,154 1997 ------------------------------------------------------------------------- REPORTABLE INTERSEGMENT CONSOLIDATED SEGMENTS OTHER ELIMINATION TOTALS ------------------------------------------------------------------------- Net interest income $ 15,921 $ 407 $ 16,328 Provision for loan losses 1,255 70 1,325 Trust and investment management fees 2,423 2,423 Other income 2,182 314 2,496 Total other expenses 15,520 2,097 17,617 Income tax expense 767 (183) 584 Segment profit 2,984 (1,263) 1,721 Segment assets 356,448 38,943 $(35,640) 359,751 1996 ------------------------------------------------------------------------- REPORTABLE INTERSEGMENT CONSOLIDATED SEGMENTS OTHER ELIMINATION TOTALS ------------------------------------------------------------------------- Net interest income $ 16,206 $ 227 $ 16,433 Provision for loan losses 66 66 Trust and investment management fees 2,094 2,094 Other income 3,412 179 3,591 Total other expenses 14,653 1,976 16,629 Income tax expense 2,333 (734) 1,599 Segment profit 4,726 (902) 3,824 Segment assets 378,516 37,358 $(33,836) 382,038
(44) 46 [Olive Letterhead] INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Horizon Bancorp We have audited the consolidated balance sheet of Horizon Bancorp and Subsidiaries as of December 31, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of Horizon's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Horizon Bancorp and Subsidiaries as of and for the two year period ended December 31, 1997, were audited by other auditors whose report dated February 25, 1998, expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Horizon Bancorp and Subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Olive LLP Fort Wayne, Indiana January 29, 1999 (45) 47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Horizon Bancorp: We have audited the accompanying consolidated balance sheet of Horizon Bancorp and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the two 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated 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 the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 25, 1998 (46) 48 HORIZON BANCORP AND SUBSIDIARIES 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 Horizon's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures. The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the 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 Olive LLP, independent public accountants, for 1998, and other independent public accountants for 1997 and 1996. 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. (47) 49 HORIZON BANCORP AND SUBSIDIARIES SUMMARY OF SELECTED FINANCIAL DATA (Table Dollar Amounts In Thousands Except Per Share Data and Ratios)
1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- EARNINGS Total interest income $ 28,559 $ 29,265 $ 28,233 $ 26,262 $ 24,179 Total interest expense 13,531 12,937 11,800 11,112 9,356 --------------------------------------------------------------- Net interest income 15,028 16,328 16,433 15,150 14,823 Provision for loan losses 1,000 1,325 66 165 Total noninterest income 5,453 4,919 5,685 3,987 4,068 Total noninterest expense 18,053 17,617 16,629 15,931 14,609 Provision for income taxes 345 584 1,599 167 1,449 --------------------------------------------------------------- Net income $ 1,083 $ 1,721 $ 3,824 $ 3,039 $ 2,668 =============================================================== Cash dividend declared $ 1,237 $ 1,264 $ 1,031 $ 895 $ 919 =============================================================== PER SHARE DATA Net income $ 1.58 $ 2.42 $ 5.19 $ 4.05 $ 3.48 Cash dividends declared 1.80 1.80 1.40 1.20 1.20 Book value at period end 46.48 46.79 46.40 43.18 36.00 Weighted average share outstanding 686,804 710,967 736,887 750,286 767,419 PERIOD END TOTALS Loans, net of deferred loan fees and unearned income $290,346 $258,115 $271,476 $241,662 $223,622 Allowance for loan losses 2,787 2,702 2,435 2,777 2,555 Total assets 416,154 359,751 382,038 368,013 369,470 Total deposits 322,401 264,413 289,180 288,984 295,784 Long-term debt 54,000 42,000 41,500 21,400 15,400 RATIOS Loan to deposit 90.06% 97.62% 93.88% 83.62% 75.59% Loan to total funding 77.14 80.06 79.03 72.80 65.98 Return on average assets .29 .46 1.04 .86 .75 Average stockholders' equity to average total assets 8.82 9.09 8.91 8.53 8.01 Return on average stockholders' equity 3.27 5.06 11.67 10.09 9.41 Dividend payout ratio (dividends divided by net income) 114.25 73.45 26.96 29.45 34.45
(48) 50 HORIZON BANCORP AND SUBSIDIARIES 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 1998 and 1997.
1998 -------------------------------------------------------------- COMMON STOCK BID PRICES ---------------------------------------- DIVIDENDS DECLARED HIGH LOW PER SHARE -------------------------------------------------------------- First Quarter $62.00 $58.63 $.45 Second Quarter 62.50 59.50 .45 Third Quarter 61.00 57.88 .45 Fourth Quarter 56.00 45.00 .45 1997 -------------------------------------------------------------- COMMON STOCK BID PRICES ---------------------------------------- DIVIDENDS DECLARED HIGH LOW PER SHARE -------------------------------------------------------------- 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, 1998 is 666. 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 Horizon's Annual Report on Form 10-K, including the Financial Statements and schedules thereto required to the filed with the Securities and Exchange Commission for Horizon's most recent fiscal year. (49) 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) Phoenix Insurance Services, Inc. Indiana Phoenix Insurance Services (a subsidiary of Horizon Bank) HBC Insurance Company, Inc. Arizona HBC Insurance Company The Loan Store, Inc. Indiana The Loan Store EX-27 4 EXHIBIT 27
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 12,771 598 18,500 0 54,612 11,746 12,090 290,346 2,787 416,154 322,401 4,000 3,867 54,000 0 0 741 31,886 416,154 24,100 4,459 0 28,559 10,578 13,531 14,028 1,000 0 18,053 1,428 1,083 0 0 1,083 1.58 1.58 4.39 64 830 0 341 2,702 1,316 401 2,787 2,787 0 201
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