-----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, Mr7KkOapYrpeDIDiptIXXtYXjRfSXtMUmL/jR6Vg+qhjq+wla2WYLNEiVq9c01SB Hjqe3TVCNdVqrjtqwEw/ag== 0000950152-02-002417.txt : 20020415 0000950152-02-002417.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002417 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 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: 1934 Act SEC FILE NUMBER: 000-10792 FILM NUMBER: 02588403 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 l92985ae10-k405.txt HORIZON BANCORP 10-K405/YEAR END 12-31-2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001 ----------------- Commission file number 0-10792 ------- Horizon Bancorp --------------- (Exact name of registrant as specified in its charter) Indiana 35-1562417 ------- ---------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 515 Franklin Square, Michigan City 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, 1,985,700 shares outstanding as of February 28, 2002 - -------------------------------------------------------------------------------- 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 average bid price of such stock as of February 28, 2002 was $24,538,930. Documents Incorporated by Reference -----------------------------------
Part of Form 10-K into which Document portion of document is incorporated - -------- ----------------------------------- Portions of the Registrant's 2001 Annual Report to shareholders I, II, VI Portions of the Registrant's Proxy Statement to be filed for its May 9, III 2002 annual meeting of shareholders
Except as provided in Part I, Part II, Part III and Part IV no part of the Registrant's 2001 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 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 1,198,020 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 remained a one-bank holding company with a wholly-owned subsidiary, Horizon Bank, N.A. ("Bank") and Bank's wholly-owned subsidiaries, Horizon Trust & Investment Management, N.A. ("Horizon Trust") and Horizon Insurance Services, Inc. ("Horizon Insurance") and nonbank subsidiaries, HBC Insurance Group ("Insurance Company") and The Loan Store, Inc., ("Loan Store"). b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Registrant's main business is commercial banking and has no other segments. c) NARRATIVE DESCRIPTION OF BUSINESS The Registrant's business is that incident to its 100% ownership of Bank 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 La Porte County, Indiana, three facilities located in Porter County, Indiana and a loan production office in Lake County, Indiana. At December 31, 2001, Bank had total assets of $587,945,000 and total deposits of $419,599,000. Aside from the stock of Bank and Insurance Company, the Registrant's only other significant assets are cash and cash equivalents totaling approximately $210,000, and dividends receivable of approximately $300,000 at December 31, 2001. The business of the Registrant, Bank, Horizon Trust, Horizon Insurance, 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 who would have a materially adverse effect on the business of the Registrant. Revenues from loans accounted for 72% in 2001,76% in 2000, and 69% in 1999 of the total consolidated revenue. Revenues from investment securities accounted for 9% in 2001, 10% in 2000, and 14% in 1999 of total consolidated revenue. The Registrant has no employees and there are approximately 209 full and part-time persons employed by Bank, Horizon Trust and Horizon Insurance as of December 31, 2001. A high degree of competition exists in all major areas where the Registrant engages in business. Bank's primary market consists of La Porte and 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. Based on deposits as of June 30, 2001, the Bank was the largest of the 11 bank and thrift institutions with offices in La Porte County with 32.7%of the deposits and the seventh sargest of the 12 institutions with offices in Porter County with 4.2% of deposits (source: FDIC Summary of Deposits Market Share Reports available at www3.fdic.gov/sod). 3 The Insurance Company offers credit life and accident and health insurance. The Loan Store, Inc. sold the majority of its assets in August 1999 and is an inactive subsidiary. The net income generated from the Insurance Company is not significant to the overall operations of the Registrant. SUPERVISION AND REGULATION The Registrant is registered as a bank holding company and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts the Registrant's nonbanking activities to those which are determined by the Federal Reserve to be closely related to banking and a proper incident thereto. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency. Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines. The Federal Deposit Insurance Corporation ("FDIC") and the Office of the Comptroller of the Currency ("OCC") have adopted risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Registrant's affiliate bank exceeded the risk-based capital requirements of the FDIC and OCC as of December 31, 2001. For the Registrant's regulatory capital ratios and regulatory requirements as of December 31, 2001, see the information under the Management Discussion and Analysis of Financial Condition section of the Annual Report to Shareholders for the year ended December 31, 2001, located in Exhibit 13, attached hereto and incorporated by reference. The Registrant's affiliate bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve, and the FDIC. A substantial portion of the Registrant's cash revenue is derived from dividends paid to it by its affiliate bank. Both federal and state law extensively regulates various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities, and other aspects of banking operations. Branching by the Registrant's affiliate bank is subject to the jurisdiction and requires notice to or the prior approval of the OCC. The Registrant and its affiliate bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. 4 FDICIA accomplished a number of sweeping changes in the regulation of depository institutions, including the Registrant's affiliate bank. FDICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares, and such other standards as the agency deems appropriate. The deposits of the Registrant's affiliate bank are insured up to $100,000 per insured account by the Bank Insurance Fund ("BIF"), which is administered by the FDIC. Accordingly, the Registrant's affiliated bank pays deposit insurance premiums to both BIF and SAIF. The Riegle-Neal Community Development and Regulatory Improvement Act of 1994 ("Act") contains seven titles pertaining to community development and home ownership protection, small business capital formation, paperwork reduction and regulatory improvement, money laundering, and flood insurance. The applicable federal supervisory agencies continue to promulgate regulations implementing the Act which apply to Registrant's affiliate bank. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows for interstate banking and interstate branching without regard to whether such activity is permissible under state law. Bank holding companies may now acquire banks anywhere in the United States subject to certain state restrictions. On November 12, 1999, the President signed into law comprehensive legislation that modernizes the financial services industry for the first time in decades. The Gramm-Leach-Bliley Act ("GLBA") permits bank holding companies to conduct essentially unlimited securities and insurance activities, in addition to other activities determined by the Federal Reserve to be related to financial services. As a result of the GLBA, the Registrant may underwrite and sell securities and insurance. It may acquire, or be acquired by, brokerage firms and insurance underwriters. The Registrant does not anticipate significant changes in its products or services as a result of the GLBA. In addition to the matters discussed above, the Registrant's affiliate bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit, and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the United States government and its various agencies, particularly the Federal Reserve. Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures, and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or the Registrant and its affiliate bank in particular would be affected. 5 BANK HOLDING COMPANY 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 2001 Annual Report to Shareholders. II. INVESTMENT PORTFOLIO a. The following is a schedule of the amortized cost and fair value of investment securities available for sale at December 31, 2001, 2000, and 1999:
(in thousands) 2001 2000 1999 -------------------------------------------------------------------- AVAILABLE FOR SALE FAIR FAIR FAIR COST VALUE COST VALUE COST VALUE U.S. Treasury and U.S. Government agencies and corporations $20,255 $20,318 $26,171 $26,002 $30,428 $29,580 State and Municipal 15,411 15,310 5,564 5,696 4,230 4,100 Mortgage-backed securities 13,812 14,117 18,850 18,934 23,565 23,225 Collateralized mortgage obligations 17,150 17,593 20,458 20,502 11,322 10,689 Other securities 315 241 315 286 -------------------------------------------------------------------- Total investment securities $66,628 $67,338 $71,358 $71,375 $69,860 $67,880 ====================================================================
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, 2001:
After one year After five years One year or less through five years through ten years After ten years (Thousands) Amount Yield Amount Yield Amount Yield Amount Yield --------------------------------------------------------------------------------- AVAILABLE FOR SALE U.S. Treasury and U.S. Government agency securities (1) $ 5,027 4.46% $ 5,911 3.53% $ 5,866 4.25% $ 3,450 6.06% Obligations of states and political subdivisions 1,037 5.91% 1,722 7.39% 2,781 6.54% 9,872 4.90% Mortgage-backed securities (2) 2,408 5.82% 6,101 6.67% 5,303 6.48% Collateralized mortgage obligations 8,000 6.00% 9,150 6.62% ------- ------- ------- ------- Total $ 6,064 4.71% $10,041 4.74% $22,748 5.79% $27,775 5.91% ======= ======= ======= =======
(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. 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 that exceeded 10% of the consolidated stockholders' equity of the Registrant at December 31, 2001. 6 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) 2001 2000 1999 1998 1997 ------------------------------------------------------------------ Commercial, financial, agricultural and commercial tax-exempt loans $100,912 $ 88,421 $ 89,361 $ 76,682 $ 73,177 Mortgage warehouse loans 205,511 102,884 85,542 Real estate mortgage loans 80,571 125,431 154,717 152,390 120,345 Installment loans 79,807 76,842 64,737 61,274 64,593 ------------------------------------------------------------------- Total loans $466,801 $393,578 $394,357 $290,346 $258,115 ===================================================================
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, mortgage warehousing and installment loans, as of December 31, 2001:
ONE YEAR OR ONE THROUGH AFTER FIVE Maturing or repricing (thousands) LESS FIVE YEARS YEARS TOTAL ---------------------------------------------------------------- Commercial, financial, agricultural and commercial tax-exempt loans $60,127 $26,959 $13,826 $100,912
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, agricultural, and commercial tax-exempt loans due after one year $22,279 $18,506
c. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans - The following schedule summarizes nonaccrual, past due, and restructured loans.
December 31 (thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------ a. Loans accounted for on a nonaccrual basis $1,772 $2,487 $1,173 $ 64 $ 319 b. Accruing loans which are contractually past due 90 days or more as to interest and principal payments 128 699 401 830 862 c. Loans not included in (a) or (b) which are "Troubled Debt Restructuring's" as defined by SFAS No. 15 ------------------------------------------------------ Totals $1,900 $3,186 $1,574 $894 $1,181 ======================================================
The decrease in nonaccrual loans in 2001 is primarily due to a decrease in nonaccrual mortgage loans of $637 thousand. The increase in nonaccrual loans in 2000 is primarily due to the increase in nonaccrual mortgage loans of $842 thousand and increase in nonaccrual commercial loans of $321 thousand. The increase in nonaccrual loans in 1999 is primarily due to the addition of 4 mortgage loans totaling $375 thousand, 8 consumer loans totaling $252 thousand and 7 commercial loans totaling $546 thousand. 7 III. LOAN PORTFOLIO (CONTINUED) (Thousands) Gross interest income that would have been recorded on nonaccrual loans out standing as of December 31, 2001 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. $129 Interest income actually recorded on nonaccrual loans outstanding as of December 31, 2001 and included in net income for the period. 0 Interest income not recognized during the period on nonaccrual loans outstanding as of December 31, 2001. $129 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. The officer responsible for the loan, the senior lending officer and the senior collections officer must review all loans placed on nonaccrual status. The senior collections officer monitors the loan portfolio for any potential problem loans. 2. Potential Problem Loans Impaired loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $1,028,000 and $609,000 at December 31, 2001 and 2000, respectively. The allowance for impaired loans, included in the Bank's allowance for loan losses totaled $242,000 and $40,000 at those respective dates. The average balance of impaired loans during 2001 and 2000 was $1,168,000 and $609,000, respectively. No interest income was recorded or received during either year on impaired loans. There were no loans classified as impaired during 1999. 3. Foreign outstandings None 4. Loan Concentrations As of December 31, 2001, there are no significant concentrations of loans exceeding 10% of total loans other than those disclosed in Item III above. 5. Other Interest-Bearing Assets There are no other interest-bearing assets as of December 31, 2001, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans. 9 IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following is an analysis of the activity in the allowance for loan losses account:
(Thousands) 2001 2000 1999 1998 1997 --------------------------------------------------------- LOANS Loans outstanding at the end of the period (1) 466,801 393,578 394,357 290,346 258,115 Average loans outstanding during the period (1) 426,821 400,524 306,142 268,209 269,348 (1) Net of unearned income and deferred loan fees ALLOWANCE FOR LOAN LOSSES 2001 2000 1999 1998 1997 --------------------------------------------------------- Balance at beginning of the period $ 4,803 $ 3,273 $ 2,787 $ 2,702 $ 2,435 --------------------------------------------------------- Loans charged-off: Commercial and agricultural loans (149) (71) (50) (39) (56) Real estate mortgage loans (515) (3) (42) (2) (1) Installment loans (917) (740) (1,135) (1,275) (1,384) --------------------------------------------------------- Total loans charged-off (1,581) (814) (1,227) (1,316) (1,441) --------------------------------------------------------- Recoveries of loans previously charged-off: Commercial and agricultural loans 115 66 82 3 50 Real estate mortgage loans 301 15 3 Installment loans 267 253 281 395 333 --------------------------------------------------------- Total loan recoveries 683 334 363 401 383 --------------------------------------------------------- Net loans (charged-off)/recovered (898) (480) (864) (915) (1,058) Provision charged to operating expense 1,505 2,010 1,100 1,000 1,325 Provision charged to discontinued operations 250 --------------------------------------------------------- Balance at the end of the period $ 5,410 $ 4,803 $ 3,273 $ 2,787 $ 2,702 ========================================================= Ratio of net (charge-offs)/recoveries to average loans outstanding for the period (0.21)% (0.12)% (0.28)% (0.34)% (0.39)% =========================================================
The provision for loan losses decreased in 2001 due to favorable experience in the mortgage warehouse business. The provision for loan losses in 2000 increased as a result of entering the mortgage warehousing business that includes sub-prime mortgages. Management expects charge-offs in all other portfolios to remain at the current levels. 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)
2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------------- % OF % OF % OF % OF % OF LOANS LOANS LOANS LOANS LOANS ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL LOANS LOANS LOANS LOANS LOANS -------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $1,678 22% $1,422 22% $ 819 23% $ 725 27% $ 765 28% Real estate mortgage 641 17% 159 32% 149 39% 61 52% 82 47% Mortgage warehousing 1,357 44% 1,628 26% 812 22% Installment 1,702 17% 1,270 20% 1,345 16% 1,800 21% 1,290 25% Unallocated 32 324 148 201 565 -------------------------------------------------------------------------------------------------- Total $5,410 100% $4,803 100% $3,273 100% $2,787 100% $2,702 100% ==================================================================================================
10 In 1998, $277 thousand of the increase in the allowance allocated to installment loans is related to loans originated at the Loan Store. The majority of the assets of The Loan Store were sold in August 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 Bank's historical charge-off rate in 1998 resulting in an additional allocation to the installment loan portfolio of $160 thousand. In 1999, Horizon began a mortgage warehousing program. This program is described in the "Management Discussion and Analysis" and Note 1 of the Registrant's Annual Report to Shareholders, Exhibit 13. In 2001, Horizon continued to grow the mortgage warehousing portfolio, however, the allowance for loan losses associated with this line of business was decreased due to favorable loss experience. 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. VII. SHORT-TERM BORROWINGS The following is a schedule of statistical information relative to securities sold under agreements to repurchase which are secured by U.S. Treasury and U.S. Government agency securities and mature within one year. 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. There were no securities sold under agreements to repurchase outstanding during 1999.
December 31 (thousands) 2001 2000 ----------------------------- Outstanding at year end $19,304 $16,698 Approximate weighted average interest rate at year-end 1.50% 5.85% Highest amount outstanding as of any month-end during the year $19,304 $16,698 Approximate average outstanding during the year $16,475 $ 2,590 Approximate weighted average interest during the year 4.15% 5.83%
RISK FACTORS A cautionary note about forward-looking statements. In its oral and written communication, the Registrant from time to time includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements can include statements about estimated cost savings, plans and objectives for future operations, and expectations about performance as well as economic and market conditions and trends. They often can be identified by the use of words like "expect," "may," "could," "intend," "project," "estimate," "believe," or "anticipate." The Registrant may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-K, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. It is intended that these forward-looking statements speak only as of the date they are made, and the Registrant undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward looking statement is made or to reflect the occurrence of unanticipated 11 events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from those contained in the forward looking statement. The discussion in 12 the 2001 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition," incorporated in Item 6 of this Form 10-K, lists some of the factors which could cause the Registrant's actual results to vary materially from those in any forward-looking statements. Your attention is directed to this discussion which can be found in Exhibit 13 to this Form 10-K. Other uncertainties which could affect the Registrant's future performance include the effects of competition, technological changes and regulatory developments; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with the Registrant's business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in the securities markets. Investors should consider these risks, uncertainties, and other factors in addition to those mentioned by the Registrant in its other filings from time to time when considering any forward-looking statement. 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 information technology departments of Bank. In addition to these principal facilities, the Bank has seven sales offices located at: 515 Franklin Square, 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 4208 N. Calumet, Valparaiso, Indiana 2650 Willowcreek Road, Portage, Indiana 2450 West Lincoln Highway, Merrillville, Indiana ITEM 3. LEGAL PROCEEDINGS - -------------------------- No material pending legal proceedings, other than ordinary routine litigation incidental to the business to which the Registrant or any of its subsidiaries is a party or of which any of their property is subject. 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 2001 fiscal year.
SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT - ---------------------------------------------- Robert C. Dabagia 63 Chairman of Horizon and the Bank since 1998; President and Chief Administrative Officer, Horizon and Bank from 1986 to retirement on December 31, 1996. Craig M. Dwight 45 President and Chief Executive Officer of Horizon and the Bank since July 1, 2001; President and Chief Administrative Officer of Horizon and as the President of the Bank since 1998; Vice President and Senior Lender, Bank since 1997: Vice President and Senior Commercial Lender, Bank since 1990 Thomas H. Edwards 49 Executive Vice President and Senior Lender, Horizon and Bank since 1999, Executive of Loan Management Services, Crowe, Chizek and Company, LLP since 1993. Lawrence J. Mazur 53 President, Horizon Trust & Investment Management, N.A. since December 1998; President, Financial Planning and Management Corporation since 1994.
13 James H. Foglesong 56 Chief Financial Officer, Horizon and Bank since January 2001; Executive Vice President and Chief Financial Officer, Security Financial Bancorp since 1995.
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 "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 2001 Annual report to Shareholders, Exhibit 13 and is incorporated herein by reference. 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The information required under this item is incorporated by reference to the information appearing in the Management's Discussion and Analysis included as Exhibit 13. 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, 2001 and 2000 Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 Notes to the Consolidated Financial Statements Report of Independent Public Accountants ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- None PART III -------- This information is omitted from this report pursuant to General Instruction G. (3) of Form 10-K as the Registrant intends to file with the Commission its definitive Proxy Statement pursuant to Regulation 14-A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 2001. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information required by this item is incorporated by reference from the Proxy statement section captioned "Board of Directors". ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The information required by this item is incorporated by reference from the Proxy statement section captioned "Executive Compensation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The information required by this item is incorporated by reference from the Proxy statement section captioned "Common Stock Ownership by Directors and Executive Officers". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information required by this item is incorporated by reference from the Proxy statement section captioned "Certain Business Relationships and Transactions". 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 2001 Annual Report to Shareholders on the pages referenced and are specifically incorporated by reference under Item 8 of this Form 10-K: 15 Annual Report Page Number ----------- Consolidated Balance Sheets 24 Consolidated Statements of Income 25 Consolidated Statements of Changes in Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to the Consolidated Financial Statements 28 - 44 Report of Independent Public Accountants 45 16 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. 3. Exhibits -------- Reference is made to the Exhibit Index that is found on page 16 of this Form 10-K. (b) Reports on Form 8-K ------------------- None (c) Exhibits -------- Reference is made to the Exhibit Index that is found on page 16 of this 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. 17 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized Horizon Bancorp --------------- registrant Date: March 19, 2002 - ----- /s/ Craig M. Dwight ------------------- Craig M. Dwight President & Chief Executive Officer (Principal executive Officer) Date: March 19, 2002 - ----- /s/ James H. Foglesong ---------------------- James H. Foglesong Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 18 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date Signature and Title March 19, 2002 /s/ Robert C. Dabagla - -------------- ------------------------------ Robert C. Dabagla, Chairman of the Board & Director March 19, 2002 /s/ Craig M. Dwight - -------------- ------------------------------ Craig M. Dwight, President & Chief Executive Officer and Director March 19, 2002 /s/ Susan D. Aaron - -------------- ------------------------------ Susan D. Aaron, Director March 19, 2002 /s/ Dale W. Alspaugh - -------------- ------------------------------ Dale W. Alspaugh, Director March 19, 2002 /s/ Charley E. Gillispie - -------------- ------------------------------ Charley E. Gillispie, Director March 19, 2002 /s/ Robert E. McBride - -------------- ------------------------------ Robert E. McBride, Director March 19, 2002 /s/ Peter L. Pairitz - -------------- ------------------------------ Peter L. Pairitz, Director March 19, 2002 /s/ Larry N. Middleton - -------------- ------------------------------ Larry N. Middleton, Director March 19, 2002 /s/ Bruce E. Rampage - -------------- ------------------------------ Bruce E. Rampage, Director March 19, 2002 /s/ Gene L. Rice - -------------- ------------------------------ Gene L. Rice, Director March 19, 2002 /s/ Robert E. Swinehart - -------------- ------------------------------ Robert E. Swinehart, Director March 19, 2002 /s/ Spero W. Valavanis - -------------- ------------------------------ Spero W. Valavanis, Director 19 EXHIBIT INDEX ------------- The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:
Exhibit Number Description Incorporated by Reference/Attached - ------ ----------- ---------------------------------- 3.1 Articles of Incorporation of Horizon Bancorp, Incorporated by Reference to Exhibit 3.1 to the Registrant's as amended Form 10-Q for the Quarter Ended September 30, 2001 3.2 By-Laws of Horizon Bancorp, as amended Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-Q for the Quarter Ended September 30, 2001 10.1* 1987 Stock Option and Stock Appreciation Rights Attached Plan of Horizon Bancorp, as amended 10.2* Nonqualified Stock Option and Stock Appreciation Rights Attached Agreement between Horizon Bancorp and Craig M. Dwight 10.3* Supplemental Employee Retirement Plan, as amended Attached 10.4* 1997 Key Employees Stock Option and Stock Appreciation Attached Rights Plan 10.5* Directors Deferred Compensation Plan Incorporated by Reference to Exhibit 10.8 to Registrant's Form 10-K for the Year Ended December 31, 1999 10.6* Employment Agreement between Horizon Bank, N.A., Incorporated by Reference to Exhibit 10.9 to Registrant's and Lawrence J. Mazur Form 10-K for the Year Ended December 31, 1999 10.7* Form of Change of Control Agreement Incorporated by Reference to Exhibit 10.10 to the Registrant's Form 10-K for the Year Ended December 31, 1999 10.8* Form of Amendment to Change in Control Agreement and Attached Schedule Identifying Material Details of Individual Agreements 13 Excerpts from Registrant's Annual Report to Shareholders Attached for the Year Ended December 31, 2001 (not deemed filed except for portions thereof which are specifically incorporated by reference into this Form 10-K) 21 Subsidiaries of the Registrant Attached
*Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K 20 EX-10.1 3 l92985aex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 1987 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF HORIZON BANCORP --------------- WHEREAS, on January 20, 1987, the Board of Directors of Horizon Bancorp ("Company") adopted the 1987 Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp ("Plan"); and WHEREAS, pursuant to paragraph 14 of the Plan, the Board of Directors reserved the right to amend the Plan subject, under certain circumstances, to shareholder approval; and WHEREAS, the Board of Directors amended the plan in certain respects and restated the Plan document, effective March 24, 1987; and WHEREAS, the Board of Directors has determined it is appropriate to amend the plan in certain respects and restate the Plan document, effective January 16, 1990; NOW, THEREFORE, the Plan is hereby amended and restated, effective January 16, 1990 to read as follows: 1. PURPOSE. This Plan is designed to promote the interest of the Company and its Subsidiaries by encouraging their officers and other key employees, upon whose judgment, initiative and industry the Company and its subsidiaries are largely dependent for the successful conduct and growth of their business, to continue their association with the Company and its Subsidiaries by providing additional incentive and opportunity for unusual industry and efficiency through stock ownership, and by increasing their proprietary interest in the Company and their personal interest in its continued success and progress. This Plan provides for the granting of (i) non-qualified stock options ("NSO's") and (ii) stock appreciation rights (SAR'S"). 2. ADMINISTRATION. (a) The Plan shall be administered by a committee of not less than three directors of the Company or its Subsidiaries ("Committee") who shall be designated from time to time by the Board of Directors. No member of the Committee shall be eligible, at any time when he is such a member, to receive an option or stock appreciation rights under this Plan. The decision of a majority of the members of the Committee shall constitute the decision of the Committee. Subject to the provisions of the Plan, the Committee is authorized (i) to direct the grant of NSO's and SAR's, (ii) to determine the employees to be granted NSO's and SAR's (iii) to determine the option period, the option price and the number of shares subject to each NSO and SAR; (iv) to determine the time or times at which NSO's and SAR's will be granted, (v) to determine the time or times when each NSO and SAR becomes exercisable and the duration of the exercise period, (vi) to determine other conditions and limitations, if any, applicable to the exercise of each NSO and SAR, and (vii) to determine the nature and duration of the restrictions, if any, to be imposed upon the sale or other disposition of shares acquired by any optionee upon exercise of an option, and the nature of the events, if any, and the duration of the period, in which any optionee's rights in respect of shares acquired upon exercise of an option may be forfeited. Each NSO and SAR granted under the Plan shall be evidenced by a written Agreement containing terms and conditions established by the Committee consistent with the provisions of the Plan. (b) The Committee is authorized, subject to the provisions of the Plan, to adopt, amend and rescind such rules and regulations as it may deem appropriate for the administration of the Plan and to make determinations and interpretations which it deems 3 consistent with the Plan's provisions. The Committee's determinations and interpretations shall be final and conclusive. (c) Notwithstanding anything to the contrary provided herein, the Committee shall not, without approval of the Board, grant options (i) with an exercise price which is less than the fair market value of the Company's stock on the date of grant or (ii) the terms and conditions of which materially differ from those contained in the Nonqualified Stock Option and Stock Appreciation Rights Agreement attached hereto as Exhibit A. 3. SHARES COVERED BY THE PLAN. The stock to be subject to NSO's and SAR's (as hereinafter described in Paragraph 11) under the Plan shall be shares of authorized common stock of the Company and may be unissued shares or treasury shares, or a combination thereof, as the Committee may from time to time determine. Subject to Paragraph 10, the maximum number of shares to be delivered upon exercise of all options granted under the Plan shall not exceed Eighty-Five Thousand (85,000) shares; provided, however, that options may not be granted for more than Forty-Two Thousand Five Hundred (42,500) shares in the aggregate during any calendar year. Shares covered by an option that remain unpurchased upon expiration or termination of the option may be used for further options. 4. ELIGIBILITY. Officers and other key salaried employees of the Company and of its Subsidiaries shall be eligible to receive NSO's and SAR's under the Plan. 5. OPTION PRICE. (a) The option price per share of stock under each NSO shall be determined by the Committee in its discretion and shall be not less than fifty percent (50%) and shall not exceed one hundred percent (100%) of the Fair Market Value of the shares on the date on which the option is granted. 4 (b) For all purposes of this Plan, the term "Fair Market Value" shall be the mean between the reported closing bid and asked prices for the shares of common stock of the Company a quoted by the North American Securities Dealers Automated Quotation System ("NASDAQ"). If the common stock of the Company is not quoted by NASDAQ, the Fair Market Value shall be determined by the Committee based upon quotations of the entities which make a market in Company stock. 6. OPTION PERIOD. No option period shall exceed ten (10) years. 7. EARLY TERMINATION OF OPTION. (a) TERMINATION OF EMPLOYMENT. All rights to exercise an option terminate thirty (30) days after the optionee's employment terminates for any reason other than his death. The Board of Directors may consider employment to be terminated if the duties and responsibilities of the optionee are substantially reduced from those duties and responsibilities held when the options were granted. An optionee's rights to exercise options may be terminated prior to the expiration of the thirty (30) day period, or at any time during the period of this Plan only with the written consent of the optionee. The Committee shall have the authority to determine in each case whether a leave of absence or military or government service shall be deemed a termination of employment for purposes of this subparagraph. (b) DEATH OF OPTIONEE. If an optionee dies, his option shall terminate one (1) year after his death (but not later than the date the option expires pursuant to its terms). During such period, subject to the limitations and option grant, it may be exercised by the personal representative of his estate or by his legatees or heirs. 8. PAYMENT FOR STOCK. Full payment for shares purchased shall be made at the time of exercising the option in whole or in part. Such payment may be made either (a) in cash or (b) at 5 the discretion of the Committee, by delivering shares of stock of the Company (the "Delivered Stock") or a combination of cash and Delivered Stock. Delivered Stock shall be valued at its Fair Market Value determined as of the date of the exercise of the option. No shares shall be issued until full payment for them has been made, and an optionee shall have none of the rights of a shareholder until shares are issued to him. 9. NONTRANSFERABILITY. No option shall be transferable, except by the optionee's will or the laws of descent and distribution. During the optionee's lifetime, his option shall be exercisable (to the extent exercisable) only by him or her. The option and any rights and privileges pertaining thereto shall not be transferred, assigned, pledged or hypothecated by him or her in any way, whether by operation of law or otherwise and shall not be subject to execution, attachment, or similar process. 10. CHANGES IN STOCK. In the event of any change in the common stock of the Company through stock dividends, split-ups, recapitalizations, reclassifications, or otherwise, or in the event that other stock shall be substituted for the present common stock of the Company as the result of any merger, consolidation, or reorganization, then the Committee may make appropriate adjustment or substitution in the aggregate number price, and kind of shares available under the Plan and in the number, price and kind of shares covered under any options granted or to be granted under the Plan. The Committee's determination in this respect shall be final and conclusive upon all parties. 11. STOCK APPRECIATION RIGHTS. (a) SAR's may be granted by the Committee, at its discretion, in conjunction with all or part of any option granted under the Plan, at the time of the grant of such option. All of the terms of this Plan respecting options shall also apply to SAR's subject to the further 6 special rules of this paragraph and such together terms and conditions not inconsistent therewith as the Committee may determine. Accordingly, each SAR by its terms shall (i) expire when the underlying option expires, (ii) become transferable only when the underlying option is transferable and under the same conditions, and (iii) become exercisable only when and to the extent that the underlying option is eligible to be exercised. Moreover, an SAR by its terms shall further provide that the "economic value" thereof (as hereinafter defined in subparagraph (c) hereof) may not exceed one hundred percent (100%) of the difference between the exercise price of the number of shares covered by the underlying option and the Fair Market Value of such shares determined at the time when the SAR is exercised and that the SAR may only be exercised when such Fair Market Value exceeds such exercise price. (b) SAR's may be exercised by an employee by surrendering the underlying option or applicable portion thereof. As provided in subparagraph (a) above, SAR's shall be exercisable at such time or times and only to the extent that the underlying option is exercisable; further, with respect to employees who are officers or directors of the Company, SAR's may be exercised, and elections to receive cash in settlement thereof may be made, only during such periods of time as may be allowed under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. Underlying options shall no longer be exercisable to the extent that they are surrendered upon exercise of related SAR's. (c) Upon such exercise of an SAR and surrender of the underlying option, the employe shall become entitled to receive the economic value of such SAR. Such economic value shall be equal to the excess of the Fair Market Value (determined on the date of exercise of such SAR) of one (1) share of stock over the option price per share specified in the underlying option, multiplied by the number of shares with respect to which SAR's shall have been exercised. 7 (d) Upon exercise of SAR's, an employee shall receive the economic value thereof, in cash, in shares of company stock, or any combination thereof. The Committee shall have the sole discretion either to determine the form in which such payment of economic value is to be made or to consent to or disapprove of the election of the employee to receive cash in full or partial payment of such value. (e) Upon the exercise of SAR's, the underlying option or part thereof to which such SAR's are related shall be deemed to have been exercised for purposes of the limitation on the number of shares of stock specified in Paragraph 3 hereof. 12. USE OF PROCEEDS. The proceeds received by the Company from the sale of stock pursuant to the Plan will be used for general corporate purposes. 13. INVESTMENT REPRESENTATIONS. Unless the shares subject to an option are registered under the Securities Act of 1933, as amended, each optionee in the agreement between the Company and the optionee shall agree for himself and his legal representatives that any and all shares of common stock purchased upon the exercise of the option shall be acquired for investment and not with a view to, or for sale in connection with, any distribution thereof. Any share issued pursuant to an exercise of an option subject to this investment representation shall bear a legend evidencing such restriction. 14. AMENDMENT AND DISCONTINUANCE. The Board of Directors may, at any time, without the approval of the stockholders of the Company, alter, amend, modify, suspend, or discontinue the Plan, but may not, without the consent of the holder of an option, or an option and an SAR, make any alteration which would adversely affect an option or SAR previously granted under the Plan or, without the approval of the stockholders of the Company, make any alteration which would: (a) increase the aggregate number of shares subject to options under the Plan, except as 8 provided in Paragraph 10; (c) permit any member of the Committee to become eligible for options under the Plan; (d) withdraw administration of Plan from the Committee or the Board of Directors; (e) extend the term of the Plan or the maximum period during which any option may be exercised; (f) change the manner of determining the option price; (g) change the class of employees eligible for options under the Plan; or (h) without the consent of the holder of the option, alter or impair any option previously granted under the Plan. 15. LIABILITY. No member of the Board of Directors, the Committee or officers or employees of the Company or its Subsidiaries shall be personally liable for any action, omission or determination made in good faith in connection with the Plan. 16. EFFECTIVE DATE AND DURATION. This Plan shall become effective upon its approval by the holders of at least a majority of the outstanding shares of common stock of the Company. Options and SAR's related thereto may be granted under the Plan for a period of three (3) years commencing January 20, 1987, the date on which the Board of Directors approved the Plan; provided, however, that no option or SAR may be exercised until the P1an has been approved by the Shareholders or the Company. No options and SAR's related thereto shall granted after January 20, 1990. Upon such date, the Plan shall expire except as to outstanding options and related stock appreciation rights which options and rights shall remain in effect until they have been exercised terminated, or have expired. 17. MISCELLANEOUS. (a) The term "Board" or "Board of Directors" herein shall mean the Board of Directors of the Company, and to the extent that any powers and discretion vested in the Board of Directors are delegated to any committee of the Board, the term "Board of Directors" shall also mean such committee. 9 (b) The term "Subsidiary" used herein shall mean any banking institution or other corporation more than fifty percent (50%) of whose total combined voting stock of all classes is held by the Company or by another corporation qualifying as a Subsidiary within this definition. DATED: January 16, 1990 HORIZON BANCORP By: _______________________________________ ATTEST: - --------------------------- Thomas P. McCormick, Secretary 10 FIRST AMENDMENT TO THE 1987 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF HORIZON BANCORP WHEREAS, Horizon Bancorp (the "Company") maintains the 1987 Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp (the "Plan"); and WHEREAS, the Company's Board of Directors has determined that it is in Company's best interest to amend the Plan; NOW, THEREFORE, pursuant to the power reserved to the Company under paragraph 14 of the Plan, the Plan is hereby amended, effective December 31, 1996, subject to the approval and adoption thereof by a majority of the Company's outstanding shares represented at the 1997 annual meeting of shareholders, in the following particulars: 1. By substituting the following for Paragraph 6 of the Plan: "6. OPTION PERIOD. No option period shall exceed twenty (20) years." 2. By substituting the following for Paragraph 7(a): "(a) TERMINATION OF EMPLOYMENT. All rights to exercise an option terminate (30) days after the optionee's employment terminates for any reason other than his death or retirement. The Committee may consider employment to be terminated if, for reasons other than that of retirement, the duties and responsibilities of the optionee are substantially reduced from those duties and responsibilities held when the options were granted. An optionee's rights to exercise options may be terminated prior to the expiration of the thirty (30) day period, or at any time during the period of this Plan only with the written consent of the optionee. The Committee shall have the authority to determine in each case whether a leave of absence or military or government service shall be deemed a termination of employment for purposes of this subparagraph." 3. By adding the following new Paragraph 7(c): "(c) RETIREMENT OF OPTIONEE. If an optionee retires, the optionee's right to exercise an option shall terminate five (5) years after the date of the optionee's retirement. An optionee shall be deemed to have retired only if the optionee's employment is voluntarily terminated on or after the date on which the optionee attains age fifty-five (55), and completes ten full years of employment for the Company or any Subsidiary." 4. By substituting the following for Paragraph 14: 11 "14. AMENDMENT AND DISCONTINUANCE. The Committee may, at any time, without the approval of the stockholders of the Company, alter, amend, modify, suspend or discontinue the Plan. Further, the Committee may, at any time, without the approval of the stockholders of the Company, extend the term of the Plan or the maximum period during which any option may be exercised. However, the Committee may not, without the consent of the holder of an option, or an option and an SAR, make any alteration which would adversely affect an option or SAR previously granted under the Plan. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on its behalf by its duly authorized officers this 17th day of December, 1996, but effective as of December 31, 1996, and subject to the approval and adoption thereof by a majority of the Company's outstanding shares represented at the 1997 annual meeting of shareholders. HORIZON BANCORP By: /s/Robert C. Dabagia ------------------------------------- Robert C. Dabagia, President [SEAL] ATTEST: By: /s/Larry E. Reed --------------------------- Larry E. Reed, Chairman 12 EX-10.2 4 l92985aex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 ------------ NONQUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT, made and executed this 28th day of January, 1991, between HORIZON BANCORP, an Indiana corporation and registered bank holding company ("Company") and CRAIG M. DWIGHT, an employee of the Company or one of its subsidiaries ("Employee"). WITNESSETH: WHEREAS, the Board of Directors of the Company ("Board") has authorized the Compensation Committee of the Board ("Committee") to grant options to acquire the Company's stock and stock appreciation rights in tandem therewith, to employees of the Company and its subsidiaries who, on the date of the grant of such options and rights, are not subject to the provisions of Section 16(b)(3) of the Securities Exchange Act of 1934; and WHEREAS, the grant of such options and rights will promote the interests of the Company and its shareholders by encouraging employees, upon whose judgment, initiative and industry the Company is largely dependent for the successful conduct and growth of its business, to continue their association with the Company by providing additional incentive and opportunity for industry and efficiency through stock ownership; and WHEREAS, it is the view of the Company that this goal may be achieved by granting nonqualified stock options and stock appreciation rights to employees from time to time; and WHEREAS, the Employee has been designated by the Committee as an employee to whom a stock option and related stock appreciation rights should be granted, as determined from the duties performed, the initiative and industry of the Employee, the nature of his service, and his potential contribution to the future development, growth and prosperity of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Employee hereby agree as follows: 1. GRANT OF OPTION. The Company grants to the Employee the right and option ("Option") to purchase all or any part of an aggregate of 1,200 shares of no par value common stock of the Company subject to the terms and conditions of this Agreement. 2. OPTION PRICE. The purchase price of the shares of common stock represented by this Option shall be $13.50 per share. 3. TERM. The term of the Option shall be ten (10) years from the date of this Agreement, subject to earlier termination as provided in this Agreement. 4. NONTRANSFERABILITY. The Option shall not be assignable or transferable by the Employee except by will or by the laws of descent and distribution. The Option shall not be pledged or hypothecated in any way, nor shall it be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or other disposition of the Option in violation of this provision or the levy of execution, attachment or similar process upon the Option shall be null and void and without effect, and shall cause the Option to be terminated. 5. EXERCISE OF OPTION. The Option may not be exercised in whole or in part after the expiration of ten (10) years from the date of this Agreement. Subject to the foregoing, the Option may not be exercised during the first year of this Agreement; after the first year and through the second year, the Option may be exercised as to not more than twenty percent (20%) of the total option shares; through the third year as to not more than forty percent (40%) of the total option shares; through the fourth year as to not more than sixty percent (60%) of the total option shares; through the fifth year as to not more than eighty percent (80%) of the total option shares; and during the sixth year and at any time and from time to time thereafter during the remaining term of the Option as to all or any part of the option shares. Notwithstanding the preceding sentence, the Option may be exercised in full in the event of a change in control of the Company or upon the death of the Employee, as provided in paragraph 7(b), below. For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if any person or entity, other than the Company, any person who on the day hereof is an officer or director of the Company or the Company's tax-qualified employee stock ownership plan, is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or, during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved by directors representing at least a majority of the directors then in office who were directors at the beginning of the period. The Option may be exercised during the lifetime of the Employee only by the Employee. Full payment for the shares purchased shall be made at the time of exercising the Option in whole or in part. Such payment may be made either (a) in cash, or (b) in the discretion of the Committee, by delivering shares of stock to the Company (the "Delivered Stock"), or a combination of cash and Delivered Stock. Delivered Stock shall be valued at its fair market value determined as of the date of the exercise of the option. No shares shall be issued until full payment for them has been made. 6. RESTRICTIVE LEGEND. The Employee hereby declares that it is his intention to hold all shares acquired as a result of this Option for investment and not with a view to resale or distribution to the public and agrees that all certificates for such shares shall bear the following legend: "The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Exchange Act of 1933. The shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act." or such other terms as shall be approved by the Committee in conjunction with counsel to the Company. 7. EARLY TERMINATION OF OPTION. (a) All rights to exercise the exercisable portion of this Option shall terminate thirty (30) days after the Employee's employment with the Company or its subsidiaries terminates for any reason other than death. A substantial reduction in duties and responsibilities of the optionee from those held at the time of this grant may be considered as termination by the Board of Directors. An optionee's rights to exercise options may be terminated prior to the expiration of the thirty (30) day period, or at any time during the period of this Plan only with the written consent of the optionee. For 2 purpose of this Agreement, the term "subsidiary" shall mean any banking institution or other corporation more than fifty percent (50%) of whose total combined voting stock of all classes is held by the Company or by another corporation which qualifies as a subsidiary within this definition. Transfer from the Company to a subsidiary or vice versa, or from one subsidiary to another, shall not be deemed termination of employment. (b) If the Employee dies while employed by the Company or its subsidiaries, the Option shall be exercisable in full within one (1) year after the date of his death at which time the Option or any portion thereof remaining unexercised shall terminate. During the one (1) year period immediately following the death of the Employee, the Option may be exercised in full, subject to the limitations of this Option, by the personal representatives of his estate or by his legatees or heirs; provided, however, this Option shall not be exercised after the expiration of ten (10) years from the date of this Agreement. 8. STOCK APPRECIATION RIGHTS (a) A stock appreciation right ("SAR") as to shares of the Company's stock is hereby granted to the Employee in conjunction with the Option. The SAR granted hereby shall (i) expire when the Option expires, (ii) become transferable only when the Option is transferable and under the same conditions, and (iii) become exercisable only when and to the extent that the Option is eligible to be exercised. The "economic value" of the SAR (as defined in subparagraph (c) hereof) may not exceed one hundred percent (100%) of the difference between the exercise price of the number of shares covered by the Option and the fair market value of such shares determined as of the date the SAR is exercised, and the SAR may only be exercised when such fair market value exceeds such exercise price. (b) The SAR may be exercised by the Employee by surrendering the Option or applicable portion thereof. As provided in subparagraph (a) above, the SAR shall be exercisable at such time or times and only the extent that the Option is exercisable. If the Employee is an officer or director of the Company, the SAR may be exercised, and elections to receive cash in settlement thereof may be made, only during such periods of time as may be allowed under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The Option shall no longer be exercisable to the extent that it is surrendered upon exercise of the SAR. (c) Upon exercise of the SAR and surrender of the corresponding Option, the Employee shall become entitled to receive the economic value of the SAR. Such economic value shall be equal to the excess of the fair market value (determined on the date of exercise of the SAR) of one (1) share of stock over the option price per share specified in paragraph 2 of this Agreement, multiplied by the number of shares with respect to which the SAR shall have been exercised. (d) Upon exercise of the SAR, the Employee shall receive the economic value thereof in cash, in shares of Company stock, or any combination thereof. The Committee shall have the sole discretion either to determine the form in which such payment of economic value is to be made or to consent to or disapprove of the election of the Employee to receive cash in full or partial payment of such value. (e) Upon exercise of the Option or applicable portion thereof, the SAR or applicable portion thereof shall be deemed to have been exercised and shall expire. 3 9. CHANGE IN STOCK. In the event of any change in the common stock of the Company through stock dividends, split-ups, recapitalizations, reclassifications, or otherwise, or in the event that other stock shall be substituted for the present common stock of the Company as the result of any merger, consolidation or reorganization, then the Company shall make appropriate adjustment or substitution in the number, kind and determination in this respect shall be final and conclusive upon all parties. IN WITNESS WHEREOF, the Company and the Employee have caused this Nonqualified Stock Option and Stock Appreciation Rights Agreement to be executed on the day and year first above written, which is the date on which the Option is granted. HORIZON BANCORP ATTEST: By: /s/ Robert C. Dabagia By: /s/ Thomas P. McCormick Secretary EMPLOYEE By: /s/ Craig M. Dwight 4 EX-10.3 5 l92985aex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 ------------ HORIZON BANCORP SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Amended and Restated as of January 1, 1997 HORIZON BANCORP SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS ----------------- ARTICLE PAGE - ------- ---- INTRODUCTION 1 I. DEFINITIONS 1 1.1 Adjustment 1 1.2 Adjustment Factor 2 1.3 Board 2 1.4 Code 2 1.5 Committee 2 1.6 Company 2 1.7 Compensation 2 1.8 Effective Date 2 1.9 Employee 2 1.10 Excess Matching Contributions 3 1.11 Excess Matching Contributions Account 3 1.12 Employer Supplemental Contributions 3 1.13 Employer Supplemental Contributions Account 3 1.14 Excess Salary Redirection Contributions 3 1.15 Excess Salary Redirection Contributions Account 3 1.16 Individual Account 3 1.17 Matching Contributions 3 1.18 Matching Contributions Account 4 1.19 Participant 4 1.20 Plan 4 1.21 Plan Year 4 1.22 Salary Redirection Contributions 4 1.23 Salary Redirection Contributions Account 4 1.24 Thrift Plan 4 1.25 Total and Permanent Disability 4 II. ELIGIBILITY AND PARTICIPATION 4 i III. CONTRIBUTIONS AND ALLOCATIONS 5 3.1 Excess Salary Redirection Contributions 5 3.2 Excess Matching Contributions 7 3.3 Employer Supplemental Contributions 7 3.4 Allocation of Adjustments 8 3.5 Allocation of Forfeitures 9 IV. FUNDING OF BENEFITS 9 4.1 Unsecured Contractual Rights 9 4.2 Trust 9 4.3 Change in Control 10 V. DISTRIBUTIONS 10 5.1 Forfeitures on Termination of Service 10 5.2 Year of Service 11 5.3 Time of Payment of Benefits 11 5.4 Method of Payment 11 5.5 Death of the Participant and Beneficiary Designation 11 5.6 Payment Form Elections 12 VI. PLAN ADMINISTRATION 12 6.1 Company 12 6.2 Benefits Committee 13 6.3 Claims Procedure 13 6.4 Records 15 6.5 No Liability 15 6.6 Indemnity of Committee Members 15 6.7 Discretionary Powers and Authority of the Company and Committee 15 VII. AMENDMENT AND TERMINATION OF THE PLAN 15 7.1 Amendment of the Plan 15 7.2 Termination of the Plan 15 VIII. MISCELLANEOUS 16 8.1 Governing Law 16 8.2 Headings and Gender 16 ii 8.3 Administration Expenses 16 8.4 Participant's Rights; Acquittance 16 8.5 Spendthrift Clause 16 8.6 Counterparts 16 8.7 No Enlargement of Employment Rights 16 8.8 Limitations on Liability 16 8.9 Incapacity of Participant or Beneficiary 17 8.10 Corporate Successors 17 SIGNATURES 17 iii INTRODUCTION ------------ Effective January 1, 1997, Horizon Bancorp (the "Company") adopts the Horizon Bancorp Supplemental Executive Retirement Plan (the "Plan") as set forth herein. This Plan constitutes a complete amendment and restatement of the Plan which was originally effective January 1, 1993. The provisions of this amended and restated Plan shall be effective for Plan Years commencing on and after January 1, 1997, unless otherwise specified herein or required by applicable law. The rights and benefits, if any, of individuals who were employed by the Company prior to the Effective Date shall be determined in accordance with the provisions of the Plan, if any, in effect on the date their employment terminated. The purpose of this Plan is to permit a select group of management or highly compensated employees of the Company or its subsidiaries who participate in the Horizon Bancorp Employees' Thrift Plan (the "Thrift Plan") to elect to defer compensation from the Company or receive contributions from the Company without regard to the limitations imposed by the Internal Revenue Code of 1986, as amended (the "Code") on the benefits which may accrue to such employees under the Thrift Plan. It is the intention of the Company that the Plan shall constitute an unfunded arrangement maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for federal income tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE I DEFINITIONS ----------- Whenever the initial letter of a word or phrase is capitalized herein, the following words and phrases shall have the meanings stated below unless a different meaning is plainly required by the context: 1.1 "Adjustment" means the amounts of earnings or losses credited to a Participant's Individual Account pursuant to Section 3.4 for each Plan Year. The amount of interest credited shall be determined based on the investment earnings under the funding method(s) used by the Company pursuant to Section 4.2. However, if no such method is used, interest shall be credited to a Participant's Individual Account at a rate equal to the average twenty-six (26) week U.S. Treasury Bill rate published in the WALL STREET JOURNAL as in effect as of the first business day of each calendar month. Effective January 1, 1997, Adjustments made to each Participant's Individual Account shall be determined as if the amounts credited to such Individual Account were invested in hypothetical investments designated by the Committee to be used to measure increases or decreases in the Individual Account over time. 1.2 "Adjustment Factor" means the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code, as applied to such items and in such manner as the Secretary of the Treasury shall provide. 1.3 "Board" means the Board of Directors of the Company. 1.4 "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section. 1.5 "Committee" means the Benefits Committee described in Section 6.2 of the Plan. 1.6 "Company" means Horizon Bancorp. 1.7 "Compensation" means a Participant's wages, salaries and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) paid during a Plan Year for personal services actually rendered in the course of employment with the Company to the extent that the amounts are includable in gross income including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, overtime and expense allowances. Compensation shall include (i) elective contributions to the Plan or any other plan maintained by the Company on the Employee's behalf, (ii) compensation deferred under an eligible deferred compensation plan within the meaning of Section 457(b) (relating to deferred compensation plans maintained by state and local governments and tax-exempt organizations), and (iii) employee contributions (under governmental plans) described in Section 141(h)(2) of the Code that are picked up by the employing unit and thus are treated as company contributions. "Elective contributions" are amounts excludable from the Employee's gross income under Section 402(a)(8) of the Code (relating to an arrangement under Section 401(k)), Section 402(h) of the Code (relating to a simplified employee pension plan), Section 125 of the Code (relating to a cafeteria plan), Section 403(b) of the Code (relating to a tax-sheltered annuity), or under this Plan. Compensation taken into account for all purposes under the Plan shall not be limited as provided in Section 401(a)(17) of the Code to the first Two Hundred Thousand Dollars ($200,000), as adjusted by the Adjustment Factor, of any Participant's Compensation. Effective January 1, 1997, Compensation shall not include wages received upon the exercise by a Participant of a stock appreciation right ("SAR") received under any plan provided by the Company or its subsidiaries. 1.8 "Effective Date" means January 1, 1997. 1.9 "Employee" means any person who is employed by the Company or any of its "afffiliates" as defined under Code Sections 414(b), 414(c), 414(m) or 414(o). 1.10 "Excess Matching Contributions" means contributions made to the Plan by the Company for the Plan Year, at the discretion of the Company, and allocated to a Participant's Individual Account by reason of the Participant's Excess Salary Redirection Contributions contributed to the Plan pursuant to Section 3.1(a). 1.11 "Excess Matching Contributions Account" means that portion of a Participant's Individual Account attributable to (a) Excess Matching Contributions allocated to such Participant pursuant to Section 3.2 and (b) the Participant's proportionate share, attributable to 2 his Excess Matching Contribution Account, of the Adjustments, reduced by any distributions from such account pursuant to Article V. 1.12 "Employer Supplemental Contributions" means contributions made to the Plan by the Company for the Plan Year, at the discretion of the Company, pursuant to Section 3.3. 1.13 "Employer Supplemental Contributions Account" means that portion of a Participant's Individual Account attributable to (a) Employer Supplemental Contributions allocated to such Participant pursuant to Section 3.3 and (b) the Participant's proportionate share, attributable to his Employer Supplemental Contributions Account, of the Adjustments, reduced by any distributions from such account pursuant to Article V. 1.14 "Excess Salary Redirection Contributions" means contributions made to the Plan pursuant to Section 3.1 by the Company, at the election of the Participant, and at the discretion of the Company, in lieu of cash Compensation under a Participation Agreement between the Participant and the Company. 1.15 "Excess Salary Redirection Contributions Account" means that portion of a Participant's Individual Account attributable to (a) Excess Salary Redirection Contributions allocated to such Participant pursuant to Section 3.1 and (b) the Participant's proportionate share, attributable to his Excess Salary Redirection Contributions Account, of the Adjustments, reduced by any distributions from such account pursuant to Article V. 1.16 "Individual Account" means the detailed record kept of the amounts credited or charged to each Participant in accordance with the terms of the Plan. Such Individual Account is comprised of whichever of the following are applicable to a particular Participant: Excess Matching Contributions Account, Excess Salary Redirection Contributions Account and Employer Supplemental Contributions Account and any earnings (or losses) with respect thereto. 1.17 "Matching Contributions" means the matching contributions made to the Thrift Plan by the Company for the Plan Year and allocated to a Participant's Matching Contributions Account under the Thrift Plan by reason of the Participant's Salary Redirection Contributions made thereunder. 1.18 "Matching Contributions Account" means the account established for a Participant under the Thrift Plan to which Matching Contributions are made. 1.19 "Participant" means a salaried Employee of the Company or its subsidiaries who is a Participant under the Thrift Plan and who becomes a Participant pursuant to the provisions of Article II of the Plan. 1.20 "Plan" means the Horizon Bancorp Supplemental Executive Retirement Plan. 1.21 "Plan Year" means the twelve (12) month period beginning January 1 and ended December 31. 3 1.22 "Salary Redirection Contributions" means a Participant's contributions made to the Thrift Plan by the Company at the election of the Participant, in lieu of cash Compensation, pursuant to a salary redirection agreement between the Participant and the Company and allocated to a Participant's Salary Redirection Contributions Account under the Thrift Plan. 1.23 "Salary Redirection Contributions Account" means the account established for a Participant under the Thrift Plan to which Salary Redirection Contributions are allocated. 1.24 "Thrift Plan" means the Horizon Bancorp Employees' Thrift Plan, as amended from time to time. 1.25 "Total and Permanent Disability" or "Totally and Permanently Disabled" means a disability as determined for purposes of the Federal Social Security Act which qualifies the Participant for permanent disability insurance payments in accordance with such Act. Disability for purposes of the Plan shall not include any disability which is incurred while the Participant is on leave of absence because of military or similar service and for which a governmental pension is payable. The Committee may require subsequent proof of continued disability, prior to the Participant's sixty-fifth (65th) birthday, at intervals of not less than six (6) months. A minimal level of earnings in restricted activity during any period of disability shall not disqualify a Participant from receiving disability benefits for such period if the disabled Participant receives disability benefits under the Social Security Act for the same period. ARTICLE II ELIGIBILITY AND PARTICIPATION ----------------------------- A management or highly compensated Employee of the Company or its subsidiaries is eligible to participate in the Plan provided such Employee is designated as a Participant by the Board in writing. ARTICLE III CONTRIBUTIONS AND ALLOCATIONS ----------------------------- 3.1 EXCESS SALARY REDIRECTION CONTRIBUTIONS. (a) AMOUNT OF CONTRIBUTION. The Company shall credit, as of each pay period, Excess Salary Redirection Contributions on behalf of each executive who is a Participant under the Plan for the Plan Year, such percentage (or dollar amount) of such Participant's Compensation as mutually agreed upon between the Participant and the Company pursuant to the terms of a Participation Agreement meeting the requirements of Section 3.1(d) prior to the beginning of each Plan Year. The Participant will elect in the Participation Agreement to defer an overall percentage (or dollar amount) of the Participant's Compensation which shall represent the total amount of deferrals to both the Thrift Plan and this Plan. The percentage (or dollar amount) of the Participant's Excess Salary Redirection Contributions shall be the percentage (or dollar amount) 4 remaining of the total percentage (or dollar amount) elected on the Participation Agreement after the maximum percentage (or dollar amount) of Salary Redirection Contributions made to the Thrift Plan are taken into account. Such percentage (or dollar amount) shall remain in effect for each Plan Year thereafter until or unless another percentage (or dollar amount) is agreed upon by the Participant and the Company prior to the beginning of the applicable Plan Year or until the Company notifies the Participant, prior to the beginning of such Plan Year, that the Participant is no longer eligible for contributions under this Section 3.1. (b) The maximum percentage of a Participant's Compensation that may constitute Excess Salary Redirection Contributions for a Plan Year shall not, when added to a Participant's Salary Redirection Contributions under the Thrift Plan, exceed twenty-five percent (25%) of such Participant's Compensation for such Plan Year. (c) TIMING OF CONTRIBUTIONS. Excess Salary Redirection Contributions made for the benefit of a Participant for any Plan Year shall be made to a Participant's Excess Salary Redirection Contributions Account within the time prescribed for making Salary Redirection Contributions under the Thrift Plan. (d) PARTICIPATION AGREEMENT. As a condition to the Company's obligation to make an Excess Salary Redirection Contribution for the benefit of a Participant pursuant to subsection (a), the Participant must execute a Participation Agreement with the Company on such forms as prescribed by the Committee in which it is agreed that the Company will redirect a portion of the Participant's Compensation, as specified in the Participation Agreement, during each pay period. The Participation Agreement for any Plan Year must be executed and delivered by the Participant and the Company prior to the January 1 of the calendar year to which the Participation Agreement relates. Provided, however, in the case of a Participant who has not previously elected to have Excess Salary Redirection Contributions made under the Plan on his behalf, such Participant may elect to have such contributions made after January 1 of the calendar year to which the Participation Agreement relates, so long as the Participant has executed and delivered an Excess Salary Redirection Agreement prior to the date the Participant renders services for the Company with respect to which the Excess Salary Redirection Contributions shall relate. The Participant's election to defer a portion of his Compensation each year shall be irrevocable once made, except that the Committee, in its sole discretion, may waive the Participant's election to defer compensation if the Participant has suffered an unforeseeable emergency which results in severe financial hardship. Such waiver shall apply to the portion of the 5 calendar year remaining after the Committee's determination that the Participant has suffered a severe financial hardship. The effective date of the waiver shall be fixed by the Committee after application by the Participant under such procedures as may be fixed by the Committee. The Participant's application shall include a signed statement of the facts causing financial hardship and any other facts required by the Committee in its discretion. For purposes of this Section 3.1, an unforeseeable emergency is a severe financial hardship to a Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant (as defined in Section 152(a) of the Code), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseen circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case; however, the Committee shall not grant any waiver of a Participant's deferral election to the extent that his hardship may be relieved (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets, to the extent liquidation of such assets would not itself cause severe financial hardship; or (iii) by cessation of Salary Redirection Contributions under the Thrift Plan. An unforeseeable emergency shall not include the need to send a Participant's child to college or the desire to purchase a home. 3.2 EXCESS MATCHING CONTRIBUTIONS. (a) AMOUNT OF CONTRIBUTION. The Company may, but shall not be required to, make Excess Matching Contributions under the Plan. Excess Matching Contributions to be made by the Company for the benefit of a Participant for any Plan Year shall consist of two parts. The first part shall be in an amount, as determined by the Board, which does not exceed the difference between (i) and (ii) below: (i) The Matching Contributions which would have been allocated to the Participant's Matching Contributions Account under the Thrift Plan for the Plan Year without giving effect to the limitations on Compensation imposed by Section 401(a)(17) of the Code, the reductions applicable to highly compensated employees due to the discrimination tests set forth in Section 401(k) and (m) of the Code, the limitations on Salary Redirection Contributions imposed by Section 402(g) of the Code or the limitations on annual additions imposed by Section 415 of the Code. (ii) The amount of Matching Contributions actually allocated to the Participant's Matching Contributions Account under the Thrift Plan for the Plan Year. 6 (b) In addition to the Excess Matching Contributions specified in subsection (a), the Company may, as determined by the Board, make an additional Excess Matching Contribution in such amount as shall be determined by the Board in its discretion. (c) TIMING OF CONTRIBUTIONS. Excess Matching Contributions made for the benefit of a Participant for any Plan Year shall be credited to a Participant's Excess Matching Contributions Account within the time prescribed for making Matching Contributions under the Thrift Plan. 3.3 EMPLOYER SUPPLEMENTAL CONTRIBUTIONS. In addition to the Excess Matching Contributions provided for in Section 3.2, the Employer may make Employer Supplemental Contributions under the plan in accordance with the provisions of subsections (a) and (b). (a) AMOUNT OF CONTRIBUTION. The Company may, but shall not be required to, contribute on behalf of a Participant such amounts as the Board may in its discretion determine from time to time to be advisable, which amounts shall constitute the Employer Supplemental Contributions under the Plan. (b) TIMING OF CONTRIBUTIONS. Employer Supplemental Contributions may be made by the Company at any time. 3.4 ALLOCATION OF ADJUSTMENTS. (a) INDIVIDUAL ACCOUNTS. The Committee shall establish and maintain an Individual Account in the name of each Participant to which the Committee shall credit all amounts allocated to each such Participant pursuant to this Article III. Each Individual Account shall be comprised of whichever of the following are applicable to a particular Participant: Excess Matching Contributions Account, Excess Salary Redirection Contributions Account and Employer Supplemental Contributions Account. (b) DETERMINATION OF ADJUSTMENTS. Following the allocations made pursuant to Sections 3.1, 3.2, and 3.3, the Committee shall determine the Adjustments for December 31 of the applicable Plan Year (and, in the event a Participant is eligible for a distribution as provided in Article V, for the last day of the month immediately preceding the month the Participant terminates service for any reason), and on such other dates as the Committee deems advisable, by adding together all income received, and realized and unrealized gains and any realized and unrealized losses since the most recent allocation of Adjustments to Participants' Individual Accounts. 7 (c) ALLOCATION OF ADJUSTMENTS PRIOR TO JANUARY 1, 1997. For all Plan Years ending prior to January 1, 1997, the Adjustments shall be allocated as of the end of the Plan Year to the Individual Accounts of Participants who maintain a credit balance in their Individual Accounts as of such date in the same proportion that the balance of each Participant's Individual Account as of such date bears to the balance of all Individual Accounts of Participants in the Plan on such date. Provided, however, in the event any Participant is entitled to a distribution of his Individual Account under Article V, the Adjustments shall be allocated as of the last day of the month immediately preceding the month in which the Participant's termination of service occurs. (d) ALLOCATION OF ADJUSTMENTS COMMENCING ON JANUARY 1, 1997. Effective as of January 1, 1997, Adjustments shall be determined for each Participant's Individual Account under Section 3.4(b) above, and then credited to each Participant's Individual Account under this subsection (d) as of the last day of the Plan Year and on such other dates as the Committee deems advisable. Provided, however, in the event any Participant is entitled to a distribution of this Individual Account under Article V, the Adjustments shall be allocated as of the last day of the month immediately preceding the month in which the Participant's termination of service occurs. No provision of the Plan shall impose or be deemed to impose any obligation upon the Company, other than an unsecured contractual obligation to make a cash payment to Participants and their beneficiaries in accordance with the terms of the Plan. Benefits payable under the Plan shall be paid directly by the Company from the Company's general assets. 3.5 ALLOCATION OF FORFEITURES. The amount, if any, of a Participant's Excess Matching Contributions and Employer Supplemental Contributions Accounts forfeited under Section 5.1 shall be allocated to the Excess Matching Contributions Accounts or the Employer Supplemental Contributions Accounts, as the case may be, of all other Participants eligible to receive Excess Matching Contributions under Section 3.2 and Employer Supplemental Contributions under Section 3.3 for the Plan Year in which the forfeiture occurs. Such allocation shall be allocated in the proportion that the Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for such Plan Year. If, however, there are no Participants under the Plan who are eligible to receive an allocation of forfeitures for the Plan Year in which a forfeiture occurs, then, once the Company has satisfied all obligations to Participants under the Plan, such forfeiture shall revert to the Company. 8 ARTICLE IV FUNDING OF BENEFITS ------------------- 4.1 UNSECURED CONTRACTUAL RIGHTS. The Plan at all times shall be unfunded and shall constitute a mere promise by the Company to make benefit payments in the future. Notwithstanding any other provision of this Plan or any trust created in connection with the Plan, neither a Participant nor his designated beneficiary shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Company prior to the time benefits are paid as provided in Article V, including any Compensation deferred hereunder by the Participant. All rights created under this Plan shall be mere unsecured contractual rights of the Participant against the Company. 4.2 TRUST. Notwithstanding the provisions of Section 4.1, the Committee may, in its discretion, satisfy all or any part of the Company's obligations under the Plan from a trust established by the Company in connection with the Plan or from an insurance contract, annuity or similar vehicle owned by the Company or by setting aside and investing amounts deferred under the Plan as an asset of the Company. Any such trust or other vehicle shall constitute solely a means to assist the Company in meeting its promised obligations under the Plan and shall not constitute a funded account within the meaning of ERISA or the Code, nor shall it create a security interest for the benefit of any Participant or beneficiary. Any trust created hereunder shall conform in all respects to the terms of the Model Trust, as described in Revenue Procedure 92-64. 4.3 CHANGE IN CONTROL. (a) ESTABLISHMENT OF A TRUST DUE TO CHANGE IN CONTROL OF THE COMPANY. Notwithstanding the provisions of Sections 4.1 and 4.2, upon a Change in Control of the Company, as defined in Section 4.3(b), the Company shall, as soon as possible, but in no event later than ninety (90) days following the Change in Control, establish a trust that shall substantially conform to the model trust, as described in Revenue Procedure 92-64. Upon the creation of such trust, the Company shall make an irrevocable lump sum contribution to the trust in an amount that is sufficient to pay all Plan Participants and beneficiaries the benefits to which Plan Participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change in Control occurred. (b) DEFINITION OF CHANGE IN CONTROL. "Change in Control" means a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 which serve similar purposes; provided that, without limitation, a Change in Control shall be deemed to have occurred if and when (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act 9 of 1934) is or becomes a beneficial owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities or (ii) individuals who were members of the Board of Directors of the Company immediately prior to a meeting of the shareholders of the Company involving a contest for the election of directors shall not constitute a majority of the Board of Directors following such election. Notwithstanding the foregoing, a Change in Control of the Company shall not occur as a result of the issuance of stock by the Company in connection with any public offering or private placement of its stock. ARTICLE V DISTRIBUTIONS ------------- 5.1 FORFEITURES ON TERMINATION OF SERVICE. A Participant's Excess Salary Redirection Contributions Account shall not be subject to forfeiture or reversion to the Company hereunder. Provided, however, to the extent specified by the Board at the time an Employee becomes a Participant, the Participant's Excess Matching Contributions Account and Employer Supplemental Contributions Account under the Plan shall be subject to forfeiture upon the Participant's termination of employment, prior to his completion of such number of Years of Service as shall be determined by the Board at the time he became a Participant, under circumstances other than any one of the following: (i) the death of the Participant while still employed; (ii) the Committee's determination that the Participant is Totally and Permanently Disabled; or (iii) a Participant's retirement on or after attaining age sixty-five (65). Notwithstanding the foregoing provisions of this Section 5.1, the Participant shall not have any preferred claim on, or any beneficial ownership interest in, any assets of the Company or any trust created in connection with the Plan and any such assets shall be and remain subject to the claims of the Company's creditors until the time such assets are actually paid to the Participant as provided in Article V. 5.2 YEAR OF SERVICE. For purposes of this Article V, a Year of Service means each Plan Year (commencing on and after the Effective Date) during which the Employee has completed one thousand (1,000) Hours of Service for the Company, as defined in Section 1.23 of the Thrift Plan. 5.3 TIME OF PAYMENT OF BENEFITS. All nonforfeitable amounts credited to a Participant's Individual Account, including any Adjustments credited in accordance with Section 3.5, shall be distributed to a Participant (or his designated beneficiary) within thirty (30) days after the earliest of a Participant's termination of service following death, Total and Permanent Disability, retirement on or after attaining age sixty-five (65) or other separation from service with the Company. 5.4 METHOD OF PAYMENT. Benefits shall be distributed in a single lump sum payment or in substantially equal annual installments over a period of not less than three (3) nor more than 10 twelve (12) years, or in a combination of those two (2) methods, as elected by a Participant in accordance with the provisions of Section 5.6. 5.5 DEATH OF THE PARTICIPANT AND BENEFICIARY DESIGNATION. If a Participant dies before the distribution of his benefits under the Plan commences, the Participant's benefits shall be distributed to the Participant's designated beneficiary or beneficiaries in a single lump sum or in substantially equal annual installments or in a combination of those two methods, as elected by the Participant in accordance with the provisions of Section 5.6, as soon as reasonably practicable after the Participant's death. Installment payments under this Section 5.5 shall be made over a period which is not less than three (3) nor more than twelve (12) years. If a Participant dies after distribution of his benefits under the Plan has begun, the balance of the Participant's benefits yet to be distributed (if any) shall continue to be distributed to the Participant's designated beneficiary or beneficiaries in the manner in which such benefits were being distributed on the date of the Participant's death. The Participant may designate a primary and contingent beneficiary or beneficiaries on forms provided by the Committee, which for this purpose may include the Participation Agreement. Such designation may be changed at any time for any reason by the Participant. If the Participant fails to designate a beneficiary, or if such designation shall for any reason be illegal or ineffective, or if the designated beneficiary shall not survive the Participant, his benefits under the Plan shall be paid: (i) to his surviving spouse; (ii) if there is no surviving spouse, to his descendants (including legally adopted children or their descendants) PER STIRPES; (iii) if there is neither a surviving spouse nor surviving descendants, to the duly appointed and qualified executor or other personal representative of the Participant to be distributed in accordance with the Participant's wills or applicable intestacy law; or (iv) in the event that there shall be no such representative duly appointed and qualified within thirty (30) days after the date of death of the Participant, then to such persons as, at the date of his death, would be entitled to share in the distribution of the Participant's estate under the provisions of the applicable statute then in force governing the descent of intestate property, in the proportions specified in such statute. The Committee may determine the identity of the distributees, and in so doing may act and rely upon any information it may deem reliable upon reasonable inquiry, and upon any affidavit, certificate, or other paper believed by it to be genuine, and upon any evidence believed by it to be sufficient. 5.6 PAYMENT FORM ELECTIONS. A Participant shall designate the method of payment to be used under Sections 5.4 and 5.5 at the time he becomes a Participant in this Plan on the form authorized by and filed with the Committee. A Participant may change such designation by completing and filing a new election form with the Committee at any time but in no event later than six (6) months prior to the date on which his benefits first become distributable under Section 5.3. If no election is in effect or if the Participant's election has not been timely or properly made at the time distributions are to commence under either Section 5.4 or 5.5, distribution shall be made in five (5) substantially equal annual installments. ARTICLE VI PLAN ADMINISTRATION ------------------- 11 6.1 COMPANY. (a) The Company, in establishing and maintaining the Plan, of necessity retains control of the operation and administration of the Plan. The Company, in accordance with specific provisions of the Plan, has, as herein indicated, delegated certain of these rights and obligations to the Committee which, in turn, shall be solely responsible for those, and only those, delegated rights and obligations. (b) The Company shall supply such full and timely information for all matters relating to the Plan as (i) the Committee, (ii) the trustee of any trust established in connection with the Plan, or (iii) the attorneys, accountants and investment manager(s) engaged on behalf of the Plan by the Company may require for the effective discharge of their respective duties. 6.2 BENEFITS COMMITTEE. (a) The Company shall appoint a committee of not less than three (3) persons, who are members of the Board but who are not Employees, to hold office at the pleasure of the Company, such committee to be known as the Benefits Committee ("Committee"). No Compensation shall be paid to members of the Committee from the trust for service on such Committee. The Committee shall choose from among its members a chairman and a secretary. Any action of the Committee shall be determined by the vote of a majority of its members. Either the chairman or the secretary may execute any certificate or written direction on behalf of the Committee. If the Company shall fail to appoint the Committee, then the Company shall constitute the plan administrator of the Plan and all references to the Committee under the Plan shall be deemed for all purposes to refer to the Company. (b) The Committee shall hold meetings upon such notice, at such place or places and at such time or times as the Committee may from time to time determine. A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business. (c) The Committee may employ such counsel, accountants, and other agents as it shall deem advisable. The Company shall pay, or cause to be paid, the reasonable compensation of such counsel, accountants, and other agents and any other reasonable expenses incurred by the Committee in the administration of the Plan and trust. (d) All members of the Committee shall serve until their resignation or dismissal by the Board and vacancies shall be filled in the same manner as the original appointments. The Board may dismiss any member of the Committee with or without cause. 12 6.3 CLAIMS PROCEDURE. (a) The Committee shall receive all applications for benefits. Upon receipt by the Committee of such an application, it shall determine all facts which are necessary to establish the right of an application to benefits under the provisions of the Plan and the amount thereof as herein provided. Upon request, the Committee shall afford the applicant the right of a hearing with respect to any finding of fact or determination. The applicant shall be notified in writing of any adverse decision with respect to his claim within sixty (60) days after its submission. The notice shall be written in a manner calculated to be understood by the applicant and shall include: (i) The specific reason or reasons for the denial; (ii) Specific references to the pertinent Plan provisions on which the denial is based; (iii) A description of any additional material or information necessary for the applicant to perfect the claim and an explanation why such material or information is necessary; and (iv) An explanation of the Plan's claim review procedures. (b) If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the claimant before the end of the initial sixty (60) day period. In no event shall such extension exceed sixty (60) days. (c) In the event a claim for benefits is denied or if the applicant has had no response to such claim within sixty (60) days of its submission (in which case the claim for benefits shall be deemed to have been denied), the applicant or his duly authorized representative, at the applicant's sole expense, may appeal the denial to the Committee within sixty (60) days of the receipt of written notice of denial or sixty (60) days from the date such claim is deemed to be denied. In pursuing such appeal the applicant or his duly authorized representative: (i) May request in writing that the Committee review the denial; (ii) May review pertinent documents; and (iii) May submit issues and comments in writing. (d) The decision on review shall be made within sixty (60) days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon 13 as possible, but not later than one hundred twenty (120) days after receipt of request for review. If such an extension of time is required, written notice of the extension shall be furnished to the claimant before the end of the original sixty (60) day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the claimant, and shall include specific references to the provisions of the Plan on which such denial is based. If the decision on review is not furnished within the time specified above, the claims shall be deemed denied on review. 6.4 RECORDS. All acts and determinations of the Committee shall be duly recorded by the secretary thereof and all such records together with such other documents as may be necessary in exercising its duties under the Plan shall be reserved in the custody of such secretary. Such records and documents shall at all times be open for inspection and for the purpose of making copies by any person designated by the Company. 6.5 NO LIABILITY. The Company assumes no obligation or responsibility to any of its Employees, Participants or beneficiaries for any act of, or failure to act, on the part of the Committee (unless the Company is the Committee). 6.6 INDEMNITY OF COMMITTEE MEMBERS. The Company shall indemnify and save harmless the members of the Committee, and each of them, from and against any and all loss resulting from liability to which the Committee, or the members of the Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of the Plan, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense. The Committee members and the Company may execute a letter agreement further delineating the indemnification agreement of this Section 6.6. 6.7 DISCRETIONARY POWERS AND AUTHORITY OF THE COMPANY AND COMMITTEE. The Company and the Committee shall have any and all power and authority (including discretion with respect to the exercise of that power and authority) which shall be necessary, properly advisable, desirable or convenient to enable them to carry out their responsibilities under the Plan. By way of illustration and not limitation, the Company and Committee are empowered and authorized to (a) make rules and regulations with respect to the Plan which are not inconsistent with the provisions of the Plan or the Code; (b) determine, consistently therewith, all questions that may arise concerning eligibility, benefits, status and rights of any person claiming particular status under the Plan, including without limitation Participants, beneficiaries and the spouses and beneficiaries thereof; and (c) subject to and consistent with the Code, to construe and interpret the Plan and correct any defect, supply any omissions or reconcile any inconsistencies in the Plan. Subject to the provisions of Section 6.3, such action shall be final, conclusive and binding upon all persons, whether or not claiming benefits under the Plan. ARTICLE VII AMENDMENT AND TERMINATION OF THE PLAN ------------------------------------- 14 7.1 AMENDMENT OF THE PLAN. The Company shall have the right at any time by action of the Board, to modify, alter or amend the Plan in whole or in part. 7.2 TERMINATION OF THE PLAN. The Company reserves the right at any time by action of its Board to terminate the Plan by resolution of the Board or to reduce or cease contributions at any time. ARTICLE VIII MISCELLANEOUS ------------- 8.1 GOVERNING LAW. The Plan shall be construed, regulated and administered according to the laws of the State of Indiana, except in those areas preempted by the laws of the United States of America in which case such laws will control. 8.2 HEADINGS AND GENDER. The headings and subheadings in the Plan have been inserted for convenience of reference only and shall not affect the construction of the provisions hereof. In any necessary construction the masculine shall include the feminine and the singular the plural, and vice versa. 8.3 ADMINISTRATION EXPENSES. The expenses of administering the Plan shall be paid by the Company. 8.4 PARTICIPANT'S RIGHTS; ACQUITTANCE. No Participant in the Plan shall acquire any right to be retained in the Company's employ by virtue of the Plan, nor, upon his dismissal, or upon his voluntary termination of employment, shall he have any right or interest in and to any assets of the Company other than as specifically provided herein. Unless a trust is established in connection with the Plan, the Company shall be liable for the payment of any benefit provided for herein. 8.5 SPENDTHRIFT CLAUSE. No benefit or interest available hereunder will be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant or the Participant's designated beneficiary, either voluntarily or involuntarily. 8.6 COUNTERPARTS. The Plan may be executed in any number of counterparts, each of which shall constitute but one and the same instrument and may be sufficiently evidenced by any one counterpart. 8.7 NO ENLARGEMENT OF EMPLOYMENT RIGHTS. Nothing contained in the Plan shall be construed as a contract of employment between the Company and any person, nor shall the Plan be deemed to give any person the right to be retained in the employ of the Company or limit the right of the Company to employ or discharge any person with or without cause, or to discipline any Employee. 8.8 LIMITATIONS ON LIABILITY. Notwithstanding any of the preceding provisions of the Plan, neither the Company, the Committee nor any individual acting as an employee or agent of 15 either of them shall be liable to any Participant, Employee or beneficiary for any claim, loss, liability or expense incurred in connection with the Plan, except when the same shall have been judicially determined to be due to the gross negligence or willful misconduct of such person. 8.9 INCAPACITY OF PARTICIPANT OR BENEFICIARY. If any person entitled to receive a payment under the Plan is physically or mentally incapable of personally receiving and giving a valid receipt for any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative), then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. 8.10 CORPORATE SUCCESSORS. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate in accordance with the provisions of Section 7.2. SIGNATURES ---------- IN WITNESS WHEREOF, the Company has caused this Amended and Restated Supplemental Executive Retirement Plan to be executed by its duly authorized officers, this day of , 1998, but effective as of January 1, 1997. HORIZON BANCORP By: -------------------------------------- Title: ---------------------------------- ATTEST: [SEAL] By: ------------------------------- Title: ---------------------------- 16 EX-10.4 6 l92985aex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 ------------ 1997 KEY EMPLOYEES' STOCK OPTION AND STOCK ------------------------------------------ APPRECIATION RIGHTS PLAN ------------------------ OF -- HORIZON BANCORP --------------- ARTICLE I --------- INTRODUCTION 1.1. PURPOSE. The 1997 Key Employees' Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp (the "Plan") is designed to promote the interests of the Company and its Subsidiaries by encouraging their officers and key employees, upon whose judgment, initiative and industry the Company and its Subsidiaries are largely dependent for the successful conduct and growth of their businesses, to continue their association with the Company and its Subsidiaries by providing additional incentive and opportunity for unusual industry and efficiency through stock ownership, and by increasing their proprietary interest in the Company and their personal interest in its continued success and progress. The Plan provides for the granting of (i) incentive stock options ("ISO's") and (ii) nonqualified stock options ("NSO's"), which the option grantee may exercise in order to purchase shares of Company common stock. The Plan also provides for the granting of stock appreciation rights ("SARs"). 1.2. EFFECTIVE DATE AND DURATION. The Effective Date of the Plan is January 1, 1997. ISOs may be granted under the Plan for a period of ten (10) years commencing January 1, 1997 and NSOs and SARs may be granted under the Plan for a period of twenty (20) years commencing January 1, 1997. However, no option or SAR may be exercised until this Plan has been approved by a majority of the shares of the Company represented at the shareholders' meeting at which approval of the Plan is considered. No ISOs shall be granted after December 31, 2006 and no NSO's or SAR's shall be granted after December 31, 2016. On December 31, 2016, the Plan shall expire except as to outstanding options and SAR's, which options and SAR's shall remain in effect until they have been exercised or terminated or have expired. ISO's must be granted within ten (10) years of the date the Plan is adopted by the Board of Directors or approved by the shareholders of the Company, whichever is earlier. 1.3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee, from time to time, may adopt any rule or procedure it deems necessary or desirable for the proper and efficient administration of the Plan provided it is consistent with the terms of the Plan. The decision of a majority of the Committee members shall constitute the decision of the Committee. Subject to the provisions of the Plan, the Committee is authorized to take the following actions: (i) to grant ISO's, NSO's and SAR's; (ii) to determine the key employees to be granted ISO's, NSO's and SAR's; (iii) to determine the option period, the option price and, subject to the limitations of Section 3.2, the number of shares subject to each option and SAR; (iv) to determine the time or times at which options and SAR's will be granted; (v) to determine the time or times at which each option and related SAR becomes exercisable and the duration of the exercise period; (vi) to determine other conditions and limitations, if any, applicable to the exercise of each option and related SAR; and (vii) to determine the nature and duration of the restrictions, if any, to be imposed upon the sale or other disposition of shares acquired by any optionee upon exercise of an option, and the nature of the events, if any, and the duration of the period, in or with respect to which any optionee's rights to shares acquired upon exercise of an option may be forfeited. Each option and related SAR granted under the Plan shall be evidenced by a written stock option agreement containing terms and conditions established by the Committee consistent with the provisions of the Plan, including such terms as the Committee shall deem advisable in order that each ISO shall constitute an "incentive stock option" within the meaning of Section 422 of the Code. The Committee's determinations and interpretations with respect to the Plan shall be final and binding on all parties. Any notice or document required to be given to or filed with the Committee will be properly given or filed if delivered or mailed by certified mail, postage prepaid, to the Committee at 515 Franklin Square, P. O. Box 800, Michigan City, Indiana 46360. 1.4. DEFINITIONS. For purposes of this Plan, unless a different meaning is clearly required by the context: (a) "Board of Directors" means the board of directors of the Company. (b) "Change in Control of the Company" means (i) any merger, consolidation or similar transaction which involves the Company and in which persons who are the shareholders of the Company immediately prior to such transaction own, immediately after such transaction, shares of the surviving or combined entity which possess voting rights equal to or less than fifty percent (50%) of the voting rights of all shareholders of such entity, determined on a fully diluted basis; (ii) any sale, lease, exchange, transfer or other disposition of all or any substantial part of the consolidated assets of the Company; (iii) any tender, exchange, sale or other disposition (other than disposition of the stock of the Company or any Subsidiary in connection with bankruptcy, insolvency, foreclosure, receivership or other similar transactions) or purchases (other than purchases by the Company or any Company sponsored employee benefit plan, or purchases by members of the Board of Directors of the Company or any Subsidiary) of shares which represent more than twenty-five percent (25%) of the voting power of the Company or any Subsidiary; (iv) during any period of two (2) consecutive years, individuals who at the date of the adoption of the Plan constitute the Company's Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director at the beginning of such period has been approved by directors representing at least a majority of the directors then in office who were directors on the date of the adoption of the Plan; (v) a majority of the members of the Company's Board of Directors recommend the acceptance of or accept any agreement, contract, offer or other arrangement providing for, or any series of transactions resulting in, any of the transactions described above. Notwithstanding the foregoing, a Change in Control of the Company (A) shall not occur as a result of the issuance of stock by the Company in connection with any public offering of its stock, or (B) be deemed to have occurred with respect to any transaction unless such transaction has been approved or shares have been tendered by a majority of the shareholders who are not Section 16 Grantees. (c) "Code" means the Internal Revenue Code of 1986, as amended. 2 (d) "Committee" means the Compensation Committee of the Board of Directors of the Company. (e) "Company" means Horizon Bancorp. (f) "Effective Date" means January 1, 1997. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Fair Market Value" means the per share fair market value of the Company's stock as determined by the Committee in good faith based upon such factors as it shall determine. (i) "For Cause" means (i) the willful and continued failure of an optionee to perform his required duties as an officer or key employee of the Company or any Subsidiary, (ii) any action by an optionee which involves willful misfeasance or gross negligence, (iii) the requirement of or direction by a federal or state regulatory agency which has jurisdiction over the Company or any Subsidiary to terminate the employment of an optionee, (iv) the conviction of an optionee of the commission of any criminal offense which involves dishonesty or breach of trust, or (v) any intentional breach by an optionee of a material term, condition or covenant of any agreement between the optionee and the Company or any Subsidiary. (j) "Permanent and Total Disability" or "Permanently and Totally Disabled" means any disability that would qualify as a disability under Section 22(c)(3) of the Code. (k) "Plan" means the stock option plan embodied herein, as amended from time to time, known as the 1997 Key Employees' Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp. (l) "Retirement" means the termination of employment by an optionee on or after attaining age fifty-five (55) and completing ten (10) full years of employment with the Company and/or any Subsidiary for reasons other than For Cause, death or Permanent and Total Disability. (m) "Section 16 Grantee" or "Section 16 Grantees" or means a person or persons subject to potential liability under Section 16(b) of the Exchange Act with respect to transactions involving equity securities of the Company. (n) "Subsidiary" or "Subsidiaries" means a corporation, partnership or limited liability company, a majority of the outstanding voting stock, general partnership interests or membership interests, as the case may be, of which is owned or controlled, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company. For the purposes of this definition, "voting stock" means stock having voting power for the election of directors, or trustees, as the case may be, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. 3 ARTICLE II ---------- ELIGIBILITY AND PARTICIPATION Officers and other key employees of the Company or any of its Subsidiaries, as selected by the Committee, shall be eligible to receive grants of ISO's, NSO's and SAR's under the Plan. Committee members shall not be eligible to receive grants of options or SAR's under the Plan while serving as Committee members. ARTICLE III BENEFITS 3.1. SHARES COVERED BY THE PLAN. The stock to be subject to options and related SAR's under the Plan shall be shares of authorized common stock of the Company and may be unissued shares or reacquired shares (including shares purchased in the open market), or a combination of the two, as the Committee may from time to time determine. Subject to the provisions of Section 4.2 and the provisions of this Section 3.1, the maximum number of shares to be delivered upon exercise of all options granted under the Plan shall not exceed ninety thousand (90,000) shares. Shares covered by an option that remain unpurchased upon the expiration or termination of the option may be made subject to further options. 3.2. GRANT OF OPTIONS. The Committee shall be responsible for granting all options and related SAR's under the Plan. The Committee shall also determine, in its sole discretion, with respect to each optionee, the following: (i) whether the options granted shall be ISO's or NSO's, or a combination of the two; (ii) whether any SAR's shall be granted in connection with such options; and (iii) whether any key employee shall be given discretion to determine whether any options granted to him shall be ISO's or NSO's or a combination of the two. 3.3. OPTION PRICE. (a) ISO OPTION PRICE. The option price per share of stock under each ISO shall be not less than one hundred percent (100%) of the Fair Market Value of the share on the date on which the option is granted; provided, however, as to officers and key employees who, at the time an ISO is granted, own, within the meaning of Code Section 424(d), more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary (referred to as "10% Shareholder-Employees") and the purchase price per share of stock under each ISO shall be not less than one hundred ten percent (110%) of the Fair Market Value of the stock on the date on which the option is granted. (b) NSO OPTION PRICE. The option price per share of stock under each NSO shall be determined by the Committee in its discretion; provided, however, the option price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the share on the date on which the option is granted. 4 3.4. OPTION PERIOD. No option period with respect to an ISO or related SAR shall exceed ten (10) years from the Effective Date and no option period with respect to an NSO or related SAR shall exceed twenty (20) years. Provided, however, the option period with respect to ISO's granted to 10% Shareholder-Employees shall not exceed five (5) years. 3.5. SPECIAL CALENDAR YEAR LIMITATION ON SHARES SUBJECT TO ISO'S. The aggregate Fair Market Value (determined at the time of the grant of the ISO's) of the stock with respect to which ISO's are exercisable for the first time by an eligible key employee during any calendar year (under all plans providing for the grant of incentive stock options of the Company or any of its Subsidiaries) shall not exceed One Hundred Thousand Dollars ($100,000.00). 3.6. SEQUENCE OF EXERCISING STOCK OPTIONS. Any option granted to an employee pursuant to the Plan shall be exercisable even if there are outstanding previously granted but unexercised options with respect to such key employee. 3.7. VESTING OF OPTIONS. All options and SAR's granted under the Plan shall vest, and thereby become exercisable at such time or times as shall be determined by the Committee in its sole discretion. The stock option agreement between the Company and the optionee shall include the schedule under which the options and SAR's shall vest. 3.8. VESTING ON CHANGE IN CONTROL OF THE COMPANY, DEATH, RETIREMENT OR DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 3.7, in the event of a Change in Control of the Company or upon the death, Permanent and Total Disability or Retirement of the optionee, any options and SAR's granted under this Plan may be exercised in full. Such ability of an optionee to exercise an option or related SAR shall be without regard to any restrictions on the vesting of the options and SAR's contained in the option agreement between the Company and the optionee. 3.9. EARLY TERMINATION OF OPTION. (a) TERMINATION OF OPTIONEE'S EMPLOYMENT PRIOR TO RETIREMENT. All rights to exercise an option and related SAR shall terminate thirty (30) days after the effective date of the optionee's termination of employment with the Company and its Subsidiaries, but not later than the date the option and related SAR expire unless such termination is For Cause or is on account of the Permanent and Total Disability, death or Retirement of the optionee. The transfer of employment of the optionee from the Company to a Subsidiary, or vice versa, or from one Subsidiary to another, shall not be deemed a termination of employment. The Committee shall have the authority to determine in each case whether a leave of absence on military or government service or orther leave of absence shall be deemed a termination of employment for purposes of this subsection (a). (b) FOR CAUSE TERMINATION OF OPTIONEE'S EMPLOYMENT. If an optionee's employment with the Company and its Subsidiaries is terminated For Cause, no previously unexercised option or SAR granted hereunder may be exercised. Rather, all unexercised options and SAR's shall terminate effective on the date the optionee receives notice of his termination For Cause. 5 (c) TERMINATION OF OPTIONEE'S EMPLOYMENT DUE TO PERMANENT AND TOTAL DISABILITY OR DEATH. If an optionee's employment terminates due to Permanent and Total Disability or death, his option and any related SAR shall terminate one (1) year after termination of his employment due to his Permanent and Total Disability or death (but not later than the date the option and any related SAR expire pursuant to their terms). During such period, subject to the limitations of this Plan and the option agreement between the Company and the optionee, the optionee, his guardian, attorney-in-fact, personal representative or administrator, as the case may be, may exercise the option or related SAR in full. (d) TERMINATION OF OPTIONEE'S EMPLOYMENT DUE TO RETIREMENT. If an optionee's employment terminates due to Retirement, his options and any related SAR shall terminate five (5) years after termination of his employment due to Retirement (but not later than the date on which the option and any related SAR expire pursuant to their respective terms). Provided, however, if the optionee dies after his Retirement but before he exercises his option or related SAR, his option and related SAR shall terminate one (1) year after the optionee's date of death (but not later than the date on which the option and any related SAR expire pursuant to their respective terms). During such period, subject to the limitations of this Plan and the option agreement between the optionee and the Company, the optionee, his guardian, attorney-in-fact, or personal representative, as the case may be, may exercise the option or related SAR in full. 3.10. PAYMENT FOR STOCK. Full payment for shares purchased hereunder shall be made at the time the option is exercised. Payment may be made by delivering to the Company (a) cash; (b) at the discretion of the Committee, whole shares of common stock of the Company ("Delivered Stock") which (i) has been owned by the optionee for more than six (6) months and has been paid for, within the meaning of SEC Rule 144 under the Exchange Act (and, if such stock was purchased from the Company by use of a promissory note, such note has been fully paid with respect to such stock), or (ii) was obtained by the optionee in the public market or otherwise than through the exercise of an option under this Plan or under any other stock option plan involving Company stock; (c) at the discretion of the Committee, a combination of cash and Delivered Stock; or (d) provided that a public market for the Company's common stock exists, (i) through a "same day sale" commitment from the optionee and a broker-dealer that is a member of the National Association of Securities Dealers ("NASD Dealer") whereby the optionee irrevocably elects to exercise the option and to sell a portion of the common stock so purchased in order to pay the option price, and whereby the NASD Dealer irrevocably commits upon receipt of such stock to forward the option price directly to the Company; or (ii) through a "margin" commitment from the optionee and an NASD Dealer whereby the optionee irrevocably elects to exercise the option and to pledge the stock so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the option price and whereby the NASD Dealer irrevocably commits upon receipt of such stock to forward the option price directly to the Company. Delivered Stock shall be valued by the Committee at its Fair Market Value determined as of the date of the exercise of the option. No shares shall be issued until full payment for them has been made, and an optionee shall have none of the rights of a shareholder with respect to any shares until they are issued to him. Upon payment of the full purchase price, and any required withholding taxes, the Company shall issue a certificate or certificates to the optionee evidencing ownership of the shares purchased pursuant to the exercise 6 of the option which contain(s) such terms, conditions and provisions as may be required and as are consistent with the terms, conditions and provisions of the Plan and the stock option agreement between the Company and the optionee. 3.11. INCOME AND EMPLOYMENT TAX WITHHOLDING. (a) PAYMENT BY OPTIONEE. The optionee shall be solely responsible for paying to the Company all required federal, state, city and local taxes applicable to his (i) exercise of an NSO or SAR under the Plan and (ii) disposition of shares acquired pursuant to the exercise of an ISO in a disqualifying disposition of the shares under Code Section 422(a)(1). (b) NSO AND SAR WITHHOLDING WITH COMPANY STOCK. Notwithstanding the provisions of subsection (a), with respect to stock to be issued pursuant to the exercise of an NSO or cash or stock to be paid pursuant to the exercise of a SAR, the Committee, in its discretion and subject to such rules as it may adopt, may permit the optionee to satisfy, in whole or in part, any withholding tax obligation which may arise in connection with the exercise of the NSO or SAR by having the Company retain shares of stock which would otherwise be issued in connection with the exercise of the NSO or SAR or accept delivery from the optionee of shares of Company stock which have a Fair Market Value, determined as of the date of the delivery of such shares, equal to the amount of the withholding tax to be satisfied by that retention or delivery. (c) ISO DISQUALIFYING DISPOSITION; WITHHOLDING WITH COMPANY STOCK. Notwithstanding the provisions of subsection (a), with respect to shares of stock to be issued pursuant to the exercise of any ISO, the Committee, in its discretion and subject to such rules as it may adopt, may permit the optionee to satisfy, in whole or in part, any withholding tax obligation which may arise in connection with the disqualifying disposition of the shares under Code Section 422(a)(1) by having the Company accept delivery from the optionee of shares of stock having a Fair Market Value, determined as of the date of the delivery of such shares, equal to the amount of the withholding tax to be satisfied by that delivery. 3.12. NOTICE OF DISQUALIFYING DISPOSITION. Any ISO granted hereunder shall require the optionee to notify the Committee in writing of any disposition of any stock issued pursuant to the exercise of the ISO under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), within ten (10) days of such disposition. 3.13. STOCK APPRECIATION RIGHTS. (a) SAR's may be granted by the Committee, in its discretion, in conjunction with all or part of any option granted under the Plan, at the time of the grant of such option. All of the terms of the Plan respecting options shall also apply to SAR's subject to the further special rules of this Section 3.13 and such other terms and conditions not inconsistent therewith as the Committee shall determine. Accordingly, each SAR by its terms shall (i) expire when the underlying option expires; (ii) become transferable only when the underlying option is transferable and under the same terms and conditions; and (iii) become exercisable only when and to the extent that the underlying option is eligible to be exercised. Moreover, a SAR by its terms shall further provide that the "economic value" thereof (as defined in subsection (c) below) 7 may not exceed one hundred percent (100%) of the difference between the exercise price of the number of shares covered by the underlying option and the Fair Market Value of such shares determined at the time when the SAR is exercised and the SAR may only be exercised when such Fair Market Value exceeds such exercise price. (b) SAR's may be exercised by an optionee by surrendering the underlying option or applicable portion thereof. As provided in subsection (a) above, a SAR shall be exercisable at such time or times and only to the extent that the underlying option is exercisable; further, with respect to employees who are officers or directors of the Company, SAR's may be exercised, and elections to receive cash in settlement thereof may be made, only during such periods of time as may be allowed under Rule 16b-3 of the Exchange Act. Underlying options shall no longer be exercisable to the extent they are surrendered upon exercise of related SAR's. (c) Upon the exercise of a SAR and the surrender of the underlying option, the optionee shall become entitled to receive the economic value of such SAR, in cash, in shares of Company stock or any combination thereof. Such economic value shall be equal to the excess of the Fair Market Value (determined on the date of exercise of such SAR) of one (1) share of stock over the option price per share specified in the underlying option, multiplied by the number of shares with respect to which SAR's shall have been exercised. The Committee shall have the sole discretion either to determine the form in which such payment of economic value is to be made or to consent to or disapprove of the election of the optionee to receive cash in full or partial payment of such value. (d) Upon the exercise of a SAR, the underlying option or part thereof to which such SAR is related shall be deemed to have been exercised for purposes of the limitation on the number of shares of stock specified in Section 3.1. 8 ARTICLE IV PLAN ADMINISTRATION AND INTERPRETATION 4.1. AMENDMENT AND TERMINATION. The Board of Directors or the Committee may, at any time, without the approval of the stockholders of the Company (except as otherwise required by applicable law, rule or regulations, or listing requirements of any National Securities Exchange on which are listed any of the Company's equity securities, including without limitation any shareholder approval requirement of Rule 16b-3 or any successor safe harbor rule promulgated under the Exchange Act ), alter, amend, modify, suspend or discontinue the Plan, but may not, without the consent of the holder of an option, or an option and a SAR, make any alteration which would adversely affect an option or SAR previously granted under the Plan or, without the approval of the stockholders of the Company, make any alteration which would: (a) increase the aggregate number of shares subject to options under the Plan, except as provided in Section 4.2; (b) decrease the minimum option price, except as provided in Section 4.2; (c) permit any Committee member to become eligible to receive grants of options or SAR's under the Plan; (d) withdraw administration of the Plan from the Committee or the Board of Directors; (e) extend the term of the Plan or the maximum period during which any option may be exercised; (f) change the manner of determining the option price; or (g) change the class of individuals eligible for options under the Plan. 4.2. CHANGES IN STOCK. (a) SUBSTITUTION OF STOCK AND ASSUMPTION OF PLAN. In the event of any change in the common stock of the Company through stock dividends, split-ups, recapitalizations, reclassifications, conversions, or otherwise, or in the event that the number of shares of common stock outstanding (which for these purposes shall be the number of shares actually outstanding plus the number of shares available for issuance pursuant to options granted under the Plan or any other employee stock option plan, as now in effect or hereafter adopted or amended, of the Company) shall increase as a result of the issuance of additional shares by the Company, or in the event that other stock shall be converted into or substituted for the present common stock of the Company as the result of any merger, consolidation, reorganization or similar transaction which results in a Change in Control of the Company, then the Committee may, and in the case of an increase in the number of shares outstanding, shall, make appropriate adjustment or substitution in the aggregate number, price, and kind of shares available under the Plan and in the number, price and kind of shares covered under any options granted or to be granted under the Plan. The Committee's determination in this respect shall be final and conclusive. Provided, however, that the Company shall not, and shall not permit its Subsidiaries to, recommend, facilitate, agree or consent to a transaction or series of transactions which would result in a Change of Control of the Company unless and until the person or persons or the entity or entities acquiring or succeeding to the assets or capital stock of the Company or any of its Subsidiaries as a result of such transaction or transactions agrees to be bound by the terms of the Plan so far as it pertains to options theretofore granted but unexercised and agrees to assume and perform the obligations of the Company hereunder. Notwithstanding the foregoing provisions of this subsection (a), no adjustment shall be made which would operate to reduce the option price of 9 any ISO below the Fair Market Value of the stock (determined on the date the option was granted) which is subject to an ISO. (b) CONVERSION OF STOCK. In the event of a Change in Control of the Company pursuant to which another person or entity acquires control of the Company (such other person or entity being the "Successor"), the kind of shares of common stock which shall be subject to the Plan and to each outstanding option and each SAR related thereto, if any, shall, automatically by virtue of such Change in Control of the Company, be converted into and replaced by shares of common stock, or such other class of securities having rights and preferences no less favorable than common stock of the Successor, and the number of shares subject to the option and the SAR related thereto, if any, and the purchase price per share upon exercise of the option and the SAR related thereto, if any, shall be correspondingly adjusted, so that, by virtue of such Change in Control of the Company, each optionee shall have the right (i) to purchase (A) that number of shares of common stock of the Successor which have a Fair Market Value equal, as of the date of such Change in Control of the Company, to the Fair Market Value, as of the date of such Change in Control of the Company, of the shares of common stock of the Company theretofore subject to his option, (B) for a purchase price per share which, when multiplied by the number of shares of common stock of the Successor subject to the option, shall equal the aggregate exercise price at which the optionee could have acquired all of the shares of common stock of the Company previously granted to the optionee; and (ii) to exercise that number of SAR's which have an economic value, as defined in Section 3.13(c) equal, as of the date of Change in Control of the Company, to the economic value, as defined in Section 3.3(c), as of such date of Change in Control of the Company, of the SAR's theretofore granted to the optionee. 4.3. INFORMATION TO BE FURNISHED BY OPTIONEES. Optionees, or any other persons entitled to benefits under this Plan, must furnish to the Committee such documents, evidence, data or other information as the Committee considers necessary or desirable for the purpose of administering the Plan. The benefits under the Plan for each optionee, and each other person who is entitled to benefits hereunder, are to be provided on the condition that he furnish full, true and complete data, evidence or other information, and that he will promptly sign any document reasonably related to the administration of the Plan requested by the Committee. 4.4. EMPLOYMENT RIGHTS. Neither the Plan nor any stock option agreement executed under the Plan shall constitute a contract of employment and participation in the Plan will not give an optionee the right to be rehired or retained in the employ of the Company, nor will participation in the Plan give any optionee any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. 4.5. EVIDENCE. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person relying thereon considers pertinent and reliable, and signed, made or presented by the proper party or parties. 4.6. GENDER AND NUMBER. Where the context admits, words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural. 10 4.7. ACTION BY COMPANY. Any action required of or permitted by the Company under the Plan shall be by resolution of the Board of Directors or by a person or persons authorized by resolution of the Board of Directors. 4.8. CONTROLLING LAWS. Except to the extent superseded by laws of the United States, the laws of Indiana shall be controlling in all matters relating to the Plan. 4.9. MISTAKE OF FACT. Any mistake of fact or misstatement of fact shall be corrected when it becomes known and proper adjustment made by reason thereof. 4.10. SEVERABILITY. In the event any provisions of the Plan shall be held to be illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and endorsed as if such illegal or invalid provisions had never been contained in the Plan. 4.11. EFFECT OF HEADINGS. The descriptive headings of the sections of this Plan are inserted for convenience of reference and identification only and do not constitute a part of this Plan for purposes of interpretation. 4.12. NONTRANSFERABILITY. No option or SAR granted under the Plan shall be transferable, except by the optionee's will or the laws of descent and distribution. During the optionee's lifetime, his option and any related SAR shall be exercisable (to the extent exercisable) only by him. The option (and any related SAR) and any rights and privileges pertaining thereto shall not be transferred, assigned, pledged or hypothecated by him in any way, whether by operation of law or otherwise and shall not be subject to execution, attachment or similar process. 4.13. LIABILITY. No member of the Board of Directors or the Committee or any officer or employee of the Company or its Subsidiaries shall be personally liable for any action, omission or determination made in good faith in connection with the Plan. Each optionee, in the stock option agreement between him and the Company, shall agree to release and hold harmless the Company, the Board of Directors, the Committee and all officers and employees of the Company and its Subsidiaries from and against any tax liability, including without limitation interest and penalties, incurred by the optionee in connection with his participation in the Plan. 4.14. INVESTMENT REPRESENTATIONS. Unless the shares subject to an option are registered under the Securities Act of 1933, each optionee, in the stock option agreement between the Company and the optionee, shall agree for himself and his legal representatives that any and all shares of common stock purchased upon the exercise of the option shall be acquired for investment and not with a view to, or for sale in connection with, any distribution of those shares. Any share issued pursuant to an exercise of an option subject to this investment representation shall bear a legend evidencing this restriction. 4.15. USE OF PROCEEDS. The proceeds received by the Company from the sale of stock pursuant to the Plan will be used for general corporate purposes. 11 HORIZON BANCORP By:__________________________________ Larry E. Reed, Chairman ATTEST: [SEAL] By:______________________________ Thomas P. McCormick, Secretary 12 EX-10.8 7 l92985aex10-8.txt EXHIBIT 10.8 EXHIBIT 10.8 ADDENDUM TO AGREEMENT --------------------- Horizon Bank, N.A. ("Bank") and ____________ (the "Employee") being parties to that certain Agreement dated October 7, 1999 (the "Agreement") with respect the Employee's rights and responsibilities upon a "Change in Control" (as defined in the Agreement) of the Bank or its parent corporation, Horizon Bancorp ("Holding Company"), hereby agree to enter into this Addendum as follows: 1. COMPENSATION UPON CHANGE IN CONTROL. Notwithstanding any provision in the Agreement to the contrary, at the time of a Change in Control, the Employee shall have the option to resign from his position and receive a severance payment equal to two (2) times the Employee's Base Salary in effect at the time of the resignation. In the event that the Employee does not resign, the Employee shall receive a severance payment upon voluntary or involuntary termination, with or without cause. The Employee shall receive a severance payment equal to two (2) times the Employee's Base Salary in effect at the time the termination occurs. 2. AMENDMENT. In the event of any conflict between the terms of this Addendum and this Agreement, the terms of this Addendum shall control and the Agreement shall be deemed to be amended to the extent necessary to effectuate the purposes of the Addendum. In all other respects, the Agreement shall be and remain in full force and effect pursuant to the terms thereof. 3. DEFINITIONS. All defined terms used but not otherwise defined herein shall have the meanings ascribed to herein the Agreement. In witness whereof, the Bank and the Employee have executed this Addendum as of this 27th day of June, 2000. BANK: HORIZON BANK, N.A. By: _________________ Printed: Title: Chairman EMPLOYEE: ------------------------- Printed: Address: SCHEDULE IDENTIFYING MATERIAL DETAILS OF INDIVIDUAL AGREEMENTS Each of the following individuals entered into an Addendum of Agreement with the terms specified above: Craig M. Dwight; James F. Foglesong; and Thomas H. Edwards EX-13 8 l92985aex13.txt EXHIBIT 13 The Future of Every Child HORIZON BANCORP CORPORATE HEADQUARTERS 515 FRANKLIN SQUARE MICHIGAN CITY, IN 46360 toll-free888-873-2640 www.accesshorizon.com A NASDAQ Traded Company - Symbol HBNC HORIZON BANCORP ANNUAL REPORT 2001 At Horizon, we know of no greater return-on-investment than the dividends resulting from time and energy spent with the children of our community. "The Future of Every Child" relates to the importance of our children and grandchildren, and offers a compelling reason to continue striving toward dynamic enhancements in our local community. As 2002 progresses, Horizon continues its commitment to excellence as an independent community bank, and as a company built on values. It is in this light that we proudly present the theme of this report, "The Future of Every Child," as a celebration of our most cherished and valuable assets. Table of Contents Message to Shareholders .....................................................3 Shareholder Value Plan ......................................................4 Summary of Financial Results ................................................6 Management Discussion and Analysis ..........................................9 Financial Statements .......................................................23 Board of Directors, Executive Officers & Shareholder Relations .............48 Subsidiaries ...............................................................49 (cover, from left to right) Ayanna Campbell, Madilyn Kazmucha, Kane Neff, Shelby Bourge, Ivan Bourge & Patrick Derr (left page) Rylee Penziol (above) Kayla Atkinson & Nick Ruhe 1 [PHOTO] 2 Message to Shareholders Dear Shareholders, We are pleased to report Horizon Bancorp achieved record earnings for the second consecutive year. Net income for twelve months ended December 31, 2001, totaled $4.125 million, or $2.08 per share, compared to net income in 2000 of $3.783 million, or $1.85 per share. This represents a 12.43 percent increase over the prior year's earnings per share and a 9.04 percent increase in net income. Our accomplishments in the challenging economic circumstances of 2001 are attributable to disciplined, rational pricing in a rapidly declining interest rate market, growth in earning assets, record mortgage loan volume, and several improved operational efficiencies. During the year we completed a major data processing system conversion for the benefit of customers and the Company, relocated our insurance agency from a stand alone office to sharing space with the Bank, entered into an agreement to sell excess real estate, closed an unprofitable branch office, and introduced full service online banking. These activities were handled extremely well and accomplished while our operational teams continued to handle their daily tasks. In addition, according to the June 30, 2001, Federal Deposit Insurance Corporation's annual deposit report, Horizon gained market share in our primary markets of LaPorte and Porter Counties, Indiana, for the third consecutive year. The quality of our loan portfolios continues to be one of our major strengths. Net loan charge-offs during the year amounted to only 0.18 of 1 percent of average loans outstanding, which is better than the average of our peers and below national averages. Our lending team continues to make asset quality a priority. As you know, Horizon Bancorp is a value driven company. Among our many values, enhancing the interests of our shareholders was the object of considerable attention during 2001. Your Board of Directors approved the Shareholder Value Plan which calls for improving communications with shareholders, increasing the number of shares outstanding by splitting the shares 3 for 1, and improving the marketability of our shares with a listing on NASDAQ SmallCap Market before the end of the year. The results to date are gratifying. On December 31, 2001, three long-time Directors retired from our Board. Mr. Boyd W. Phelps, Mr. Russell L. Arndt, and Mr. James D. Brown have served our company and community with distinction throughout their tenures. We thank them for their years of dedication and loyalty to Horizon Bancorp, and look forward to their continued friendship and support. On behalf of the entire Horizon Bancorp family, our thanks to you for your continued support and confidence. Robert C. Dabagia Craig M. Dwight Chairman President & Chief Executive Officer [PHOTO](opposite page) Megan & Paige Nilson (above) Charles Trowbridge 3 Shareholder Value Plan The year 2001 saw the dynamic implementation of many new systems and programs at Horizon Bancorp, the most bold and innovative of which was the Shareholder Value Plan. A four-phase initiative launched in October, the Shareholder Value Plan is a comprehensive strategic plan designed to buck the "mega-bank" trend, and to help Horizon remain a leader in independent community banking. Unanimously endorsed by the Board of Directors, the plan will allow the Bank to broaden its shareholder base, to focus on local investors, and to remain independent. Its four stages of implementation include: improved shareholder communications, a 3 for 1 stock split, listing on NASDAQ SmallCap Market, and the introduction of a dividend reinvestment plan. Starting in January of 2001, Horizon increased the content of our quarterly shareholder letter and began to issue informative press releases through business wire services. Phase two, a 3 for 1 stock split, was approved by the Board at its meeting on Tuesday, October 16, 2001. Shareholders of record at the close of business on October 31, 2001, received two additional shares for each one owned, increasing the number of Horizon Bancorp shares outstanding from 661,900 to 1,985,700. The split reaffirmed the Board's unwavering commitment to remain an independent community bank by increasing the number of shares outstanding and providing an affordable entry price for Horizon's stock. By year-end, phase three of the plan was realized, as Horizon Bancorp proudly gained a listing on NASDAQ SmallCap Market, trading under the symbol HBNC. During 2002 the remaining phases will be implemented -- a dividend reinvestment plan and 4 the option for shareholders to elect direct deposit of their dividend checks into their bank account. Horizon Bancorp now has approximately 1,000 shareholders, with 600 living in Northwest Indiana or Southwest Michigan. The goal is to significantly increase the percentage of local ownership by the end of 2003. "We are a locally-owned, independent, community bank holding company, and we intend to stay that way," said Horizon President and CEO Craig M. Dwight. "In order to remain independent, we need to provide more liquidity for our stock at a reasonable price and expand our local shareholder base," he continued, "and the steps we are taking are designed to do just that." As 2002 progresses, Horizon's Shareholder Value Plan will continue to provide an affordable investment opportunity for local residents in Northwest Indiana. Through the dividend reinvestment plan, Horizon shareholders will be able to reinvest some or all of their dividends to purchase additional common shares and will have the ability to make additional cash purchases. Dividend reinvestment plans typically offer shareholders the opportunity to increase their ownership of a company's stock at a lower cost than acquiring the stock through other avenues. Said Chairman Robert C. Dabagia, "We believe our dividend reinvestment plan will encourage and promote purchases of our stock by local and regional residents who have a vested interest in Horizon remaining an independent community bank. As we have previously stated, we believe local ownership of our stock by individuals with long-term investment objectives will be one of the keys to our continued success." 5 HORIZON BANCORP AND SUBSIDIARIES Summary of Financial Results (Dollar Amounts In Thousands Except Per Share Data and Ratios)
2001 2000 1999 1998 1997 ------------------------------------------------------------------------------ Earnings Net interest income $ 19,807 $ 18,654 $ 15,132 $ 14,517 $ 16,060 Provision for loan losses 1,505 2,010 1,100 820 1,255 Total noninterest income 9,521 6,856 5,882 5,453 4,919 Total noninterest expense 21,106 17,905 19,430 17,436 17,063 Provision for income taxes 2,592 1,812 675 460 664 ------------------------------------------------------------------------------ Net income (loss) from continuing operations 4,125 3,783 (191) 1,254 1,997 Loss, net of tax, from discontinued operations (163) (171) (276) ------------------------------------------------------------------------------ Net income (loss) $ 4,125 $ 3,783 $ (354) $ 1,083 $ 1,721 ------------------------------------------------------------------------------ Cash dividend declared $ 1,179 $ 1,228 $ 1,218 $ 1,237 $ 1,264 ------------------------------------------------------------------------------ Per Share Data Net income (loss) $ 2.08 $ 1.85 $ (.18) $ .53 $ .81 Cash dividends declared .60 .60 .60 .60 .60 Book value at period end 17.60 15.90 13.93 15.49 15.60 Weighted average share outstanding 1,985,458 2,048,649 1,966,173 2,060,412 2,132,901 Period End Totals Loans, net of deferred loan fees and unearned income $ 466,801 $ 393,578 $ 394,357 $ 290,346 $ 258,115 Allowance for loan losses 5,410 4,803 3,273 2,787 2,702 Total assets 587,945 531,776 525,996 416,154 359,751 Total deposits 419,599 386,348 363,668 322,401 264,413 Total borrowings 127,637 109,468 129,500 58,000 58,000 Ratios Loan to deposit 111.25% 101.87% 108.44% 90.06% 97.62% Loan to total funding 85.30 79.38 84.14 77.14 80.06 Return on average assets .76 .73 (.08) .29 .46 Average stockholders' equity to average total assets 6.29 5.92 7.01 8.82 9.09 Return on average stockholders' equity 12.11 12.41 (1.13) 3.27 5.06 Dividend payout ratio (dividends divided by net income) 28.85 32.43 (344.07) 114.25 73.45 Price to book value ratio 129.83 59.21 95.72 96.82 125.56 Price to earnings ratio 12.94 5.10 N/A 28.48 24.28
All share and per share amounts have been adjusted for the three-for-one stock split declared October 16, 2001. 6 {GRAPH] Net Income Excluding Non-Recurring Items Net Income Excluding Non-Recurring Items Net income excluding non-recurring items increased $342,000 or 9% from 2000 to 2001. Non-recurring expense items for 1999 include $2.1 million ESOP termination expense. Total Assets - Average Balances (dollars in millions) Total Assets - Average Balances Total average assets increased $16.933 million or 3.3% from 2000 to 2001. The growth came primarily in Mortgage Warehouse loans funded by growth in interest bearing Transaction accounts. During 2001 the Bank sold $35 million of fixed rate mortgage loans 2001 to reduce interest rate risk. LaPorte County Deposit Market Share LaPorte County Deposit Market Share Horizon now covers 32% of deposits in LaPorte County, up from 30% in 2000. This increase marks the fourth consecutive year of market share growth. Porter County Deposit Market Share Porter County Deposit Market Share Horizon first opened a branch in Porter County in 1994. Horizon now has three branches in that County and has increased market share every year since 1994. 7 [PHOTO] 8 Management Discussion and Analysis Analysis of Financial Condition. . . . . . . . . . . . . . . . . . . . . . . 10 Result of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Liquidity and Rate Sensitivity Management . . . . . . . . . . . . . . . . . 18 [PHOTO] (opposite page) Kyra Risner (from left to right) Taylor Burhans, Noah Carter, Matt, Gina & Sean Stevenson, Kaylee Jank & MacKenzie Veach 9 Analysis of Financial Condition INVESTMENT SECURITIES Horizon maintains a high quality investment portfolio with low credit risk. Investment securities totaled $67.338 million at December 31, 2001, and consisted of U.S. Treasury and Government Agency securities of $20.318 million (30.2)%; Municipal securities of $15.310 million (22.7)%; Mortgage-backed securities of $14.117 million (21.0)%; and collateralized mortgage obligations of $17.593 million (26.1)%. As indicated above, 47.1% of the investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations. 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 and collateralized mortgage obligations 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, 2001, the mortgage-backed securities and collateralized mortgage obligations in the investment portfolio had an average life of 4.2 years. 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, however, this risk is mitigated by a shorter average life. Management currently believes that prepayment risk on these securities is nominal. At December 31, 2001 and 2000, all investment securities were classified as available for sale. 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 $710 thousand, which resulted in a $430 thousand addition, net of tax, to stockholders' equity at December 31, 2001. This compared to a $9 thousand, net of tax, addition in stockholders' equity at December 31, 2000. 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, 2001, Horizon has investments in the common stock of the Federal Reserve and Federal Home Loan Bank totaling $6.738 million compared to $6.239 million at December 31, 2000. At December 31, 2001, Horizon does not maintain a trading account and is not using any derivative products for hedging or other purposes. LOANS Total loans, the principal earning asset of the Bank, were $466.801 million at December 31, 2001. The current level of loans is an increase of 18.6% from the December 31, 2000, level of $393.578 million. As the table below indicates, the increase is related to the growth in mortgage warehouse loans, partially offset by a planned reduction of mortgage loans during 2001. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 10 HORIZON BANCORP & SUBSIDIARIES
DOLLAR PERCENT DECEMBER 31 2001 2000 CHANGE CHANGE - ------------------------------------------------------------------------------------------------------------------- Real estate loans 1 - 4 family $ 77,641 $ 123,136 $ (45,495) (36.95)% Multi-family 41 246 (205) (83.33) Other 2,889 2,049 840 41.00 =============================================== Total 80,571 125,431 (44,860) (35.76) =============================================== Commercial loans Working capital and equipment 60,260 67,969 (7,709) (11.34) Real estate, including agriculture 27,812 11,151 16,661 149.41 Tax exempt 6,584 7,075 (491) (6.94) Other 6,256 2,226 4,030 181.04 Total 100,912 88,421 12,491 14.13 =============================================== Consumer loans Auto 20,664 12,249 8,415 68.70 Recreation 2,362 2,499 (137) (5.48) Real estate/home improvement 33,937 36,221 (2,284) (6.31) Home equity 13,305 11,883 1,422 11.97 Credit cards 4,227 4,751 (524) (11.03) Unsecured 1,189 6,767 (5,578) (82.43) Other 4,123 2,472 1,651 66.79 Total 79,807 76,842 2,965 3.86 =============================================== Mortgage warehouse loans Prime 152,760 58,500 94,260 161.13 Sub-Prime 52,751 44,384 8,367 18.85 Total 205,511 102,884 102,627 99.75 =============================================== Grand total $ 466,801 $ 393,578 $ 73,223 18.60% ===============================================
The acceptance and management of credit risk is an integral part of the 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 $80.571 million or 17% of total loans as of December 31, 2001, compared to $125.431 million or 32% of total loans as of December 31, 2000. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio. In addition to the customary real estate loans described above, the Bank also has outstanding on December 31, 2001, $13.305 million in home equity lines of credit and $11.883 million at December 31, 2000. Credit lines normally limit the loan to collateral value to no more than 89%. These loans are classified as consumer loans in the table above and in Note 3 of the consolidated financial statements. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 11 Residential real estate lending is a highly competitive business. As of December 31, 2001, the real estate loan portfolio reflected a wide range of interest rate and repayment patterns, but could generally be categorized as follows:
2001 2000 ----------------------------------------------------------------------------------------- PERCENT OF PERCENT OF AMOUNT PORTFOLIO YIELD AMOUNT PORTFOLIO YIELD ----------------------------------------------------------------------------------------- Fixed rate Monthly payment $ 37,425 46.48% 7.10% $ 81,357 64.86% 7.41% Biweekly payment 10,772 13.37 7.53 14,835 11.83 7.59 Adjustable rate Monthly payment 32,095 39.80 6.99 28,933 23.07 8.05 Biweekly payment 279 .35 7.23 306 .24 8.93 ========================== ========================== Total $ 80,571 100.00% 7.11% $125,431 100.00% 7.54% ========================== ==========================
In addition to the real estate loan portfolio, the Bank sells real estate loans and retains the servicing rights. On December 31, 2001, the portfolio serviced consisted of 1,509 loans totaling $106.140 million. Total loans sold, servicing retained, during 2001 totaled approximately $72 million. COMMERCIAL LOANS Commercial loans totaled $100.912 million or 21.6% of total loans as of December 31, 2001, compared to $88.421 million or 22.6% as of December 31, 2000. Total commercial loans increased 14.1% in 2001. Commercial loans consisted of the following types of loans at December 31:
2001 2000 ---------------------------------------------------------------------------------------- PERCENT OF PERCENT OF NUMBER AMOUNT PORTFOLIO NUMBER AMOUNT PORTFOLIO ---------------------------------------------------------------------------------------- SBA guaranteed loans 23 $ 4,186 4.15% 19 $ 2,379 2.69% Municipal government 36 6,584 6.52 42 7,411 8.38 Lines of credit 175 18,216 18.05 172 23,310 26.36 Real estate and equipment term loans 277 71,926 71.28 312 55,321 62.57 ---------------------------------------------------------------------------------------- Total 511 $100,912 100.00% 545 $ 88,421 100.00% ----------------------------------------------------------------------------------------
CONSUMER LOANS Consumer loans totaled $79,807 million or 17% of total loans as of December 31, 2001, compared to $76.842 million or 20% as of December 31, 2000. The total consumer loan portfolio increased 3.9% in 2001. MORTGAGE WAREHOUSE LOANS In November 1999, Horizon began a mortgage-warehousing program. Horizon enters into agreements with mortgage companies and purchases, at its discretion, mortgage loans from mortgage companies at par, net of certain fees, and later sells them back to the mortgage companies at the same amount and without recourse provisions. Interest income is recorded based upon a rate of interest tied to the prime rate during the funding period, not the rates on the individual note. Such loans are made to individuals and reviewed, prior to purchase, for evidence that the loans are of secondary market quality and meet Horizon's internal underwriting guidelines. An assignment of the mortgage to Horizon is required. In addition, Horizon takes possession of the original note and forwards such note to the end investor. In the event that the end investor would not honor this commitment and the mortgage companies would not be able to honor their repurchase obligations, Horizon would then need to sell these loans in the secondary market at the fair value of these loans. Loans are typically resold within 30 days and are seldom held more than 90 days. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 12 HORIZON BANCORP & SUBSIDIARIES ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses represents Horizon'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. Horizon utilizes a loan grading system that helps identify, monitor, and address asset quality problems, should they arise, in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. 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. Horizon also reviews the current and anticipated economic conditions of its lending market to determine the effect they may have on the loss experience of the loan portfolio. The methodology described above is consistent with the Office of the Comptroller of the Currency's guidance in determining the adequacy of the allowance for loan losses. At December 31, 2001, the allowance for loan losses was $5.410 million or 1.16% of total loans outstanding, compared to $4.803 million and 1.22% at December 31, 2000. During 2001 the provision for loan losses totaled $1.505 million compared to $2.010 million in 2000. The allowance as a percent of total loans declined due to an increase in mortgage warehouse loans. NONPERFORMING LOANS Nonperforming loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning nonperforming loans to an earning asset basis. Nonperforming loans for the previous three years ending December 31 are as follows: 2001 2000 1999 - -------------------------------------------------------------------------- Nonperforming loans $1,900 $3,186 $1,574 Nonperforming loans total 35% of the allowance for loan losses at December 31, 2001, compared to 66% and 48% of the allowance for loan losses on December 31, 2000 and 1999, 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, second mortgage loans, and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Other real estate owned (OREO) net of any related allowance for OREO losses for the previous three years ending December 31 are as follows: 2001 2000 1999 - ------------------------------------------------------------------------ Other real estate owned $538 $136 $0 MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 13 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 $419.599 million at December 31, 2001, compared to $386.348 million at December 31, 2000, or an increase of 8.6%. Below is a table of average deposits and rates by category for the previous three years ended December 31.
AVERAGE BALANCE OUTSTANDING AVERAGE RATE PAID FOR THE YEAR FOR THE YEAR ENDED DECEMBER 31 ENDED DECEMBER 31 -------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand deposits $ 41,915 $ 40,254 $ 43,258 Interest-bearing demand deposits 94,186 67,853 45,679 1.55% 3.29% 2.45% Savings deposits 37,909 38,536 45,358 1.53 2.21 1.77 Time deposits 227,270 247,254 203,180 5.54 5.91 5.25 ------------------------------------------- Total deposits $401,280 $393,897 $337,475 ===========================================
In 1999 and 2000, Horizon revised and enhanced its interest-bearing consumer and commercial demand deposit products. These product changes caused the increases in the average balances as displayed in the table above. Certificates of deposit of $100,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2001: Due in three months or less $10,480 Due after three months through six months 14,159 Due after six months through one year 6,498 Due after one year 14,197 $45,334 Interest expense on time certificates of $100,000 or more was approximately $4,067,000, $6,557,000, and $4,067,000 for 2001, 2000, and 1999, respectively. SHAREHOLDER VALUE PLAN During 2001 Horizon initiated a Shareholder Value Plan. The Plan is a comprehensive strategic plan to broaden and improve the market for Horizon's common stock with local community investors who have a long-term, personal interest in helping Horizon remain an independent community bank. It includes improved communications with shareholders and customers as well as efforts to improve the marketability of its common stock. During the fourth quarter, two important components of the shareholder Value Plan were completed. These included a three for one stock split and the listing of Horizon's stock on the NASDAQ SmallCap Market. Prior to this Horizon's stock was traded on the Bulletin Board. Horizon plans to implement additional stages of the Shareholder Value Plan, including a dividend reinvestment plan, in early 2002. RETIREMENT PLANS On July 20, 1999, the Board of Directors of Horizon Bancorp authorized the termination of the Horizon Bancorp Employee Stock Ownership Plan ("ESOP"). This decision was based upon a thorough financial analysis of the impact this plan has had on the earnings and capital of Horizon since its inception and the expected future impact retaining this plan would likely have on Horizon. On December 31, 1999, the debt owed by the ESOP was repaid with the proceeds from the sale of a portion of the unallocated shares to Horizon Bancorp. The remaining shares for all active participants were allocated to participants. The termination of the ESOP resulted MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 14 HORIZON BANCORP & SUBSIDIARIES in an expense of $2.073 million for 1999. The remaining shares in the ESOP plan were transferred to the Stock Bonus Plan. Prior to Horizon's stock being listed on NASDAQ SmallCap, the market value of the shares held in Horizon's Stock Bonus Plan was classified outside of stockholders' equity due to these shares having a put option. The put option was eliminated when the shares became readily marketable, thereby reclassifying the Stock Bonus Plan equity to stockholders' equity at December 31, 2001. The retirement plans of Horizon own approximately 19% of the outstanding shares at December 31, 2001. CAPITAL RESOURCES The capital resources of Horizon and Bank exceed regulatory capital ratios for "well capitalized" banks at December 31, 2001. Stockholders' equity totaled $34.943 million as of December 31, 2001, compared to $31.624 million ($6.676 million from Stock Bonus Plan) as of December 31, 2000. At year-end 2001, the ratio of stockholders' equity to assets was 5.94% compared to 5.95% for 2000. Horizon's capital increased during the year 2001 as a result of increased earnings, net of dividends declared, and the increase in the valuation allowance for securities available for sale, net of treasury stock purchases. The growth in assets offset the growth in equity, keeping the equity to asset ratio approximately the same from 2000 to 2001. The Board of directors at their February 19, 2002, meeting, approved the formation of a statutory trust for the purpose of issuing trust preferred securities through a pooled offering. The approved issuance should not exceed $12 million. The trust will issue the preferred securities in amounts, terms, and prices to be determined at the time of the offering. These securities will be considered tier 1 equity by the regulatory agencies of the Bank and will provide sufficient capital for continued growth. Horizon paid dividends in the amount of $.60 per share in 2001, 2000, and 1999 adjusted for the three for one stock split declared in 2001. The dividend payout ratio (dividends as a percent of net income) was 29% during 2001, 32% during 2000, and (344)% in 1999. For information regarding dividend restrictions, see Note 1 of the Notes to the Consolidated Financial Statements. As of December 31, 2001, 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. Result of Operations NET INCOME Consolidated net income (loss) from continuing operations was $4.125 million or $2.08 per share in 2001, $3.783 million or $1.85 per share in 2000 and $(191) thousand or $(.10) per share in 1999. All per share information has been adjusted to give effect for the three for one stock split declared October 16, 2001. In April 1999, the Board of Directors of Horizon Bancorp approved discontinuing the operations of The Loan Store, Inc., a wholly owned subsidiary of Horizon Bancorp. On August 13, 1999, substantially all of the assets of The Loan Store, Inc. were sold. Losses related to this subsidiary were $163 thousand or $.08 per share in 1999. 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 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. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 15
2001 2000 1999 --------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ------------------------------------------------------------------------------------------------------------- Assets Interest-bearing assets Loans - total (1) (3) $426,821 $36,304 8.51% $400,524 $36,883 9.21% $306,142 $25,634 8.37% Taxable investment securities, including FRB and FHLB stock 65,598 4,085 6.23 73,203 4,871 6.65 73,322 4,647 6.34 Nontaxable investment securities (2) 2,635 114 4.33 280 13 4.64 3,417 167 4.89 Interest-bearing balances and money market investments (4) 733 34 5.37 636 33 5.19 943 43 4.56 Federal funds sold 6,626 240 3.62 2,413 153 6.34 8,375 406 4.85 -------- ------- ---- -------- ------- ---- ------- ------ ---- Total interest-bearing assets 502,413 40,777 8.12 477,056 41,953 8.79 392,199 30,897 7.88 ------- ------- ------- Noninterest-earning assets Cash and due from banks 19,051 15,739 14,083 Allowance for loan losses (5,139) (4,048) (2,748) Other assets 25,184 26,032 24,825 -------- -------- -------- Total assets $541,509 $514,779 $428,359 -------- -------- -------- Liabilities & Stockholders' Equity Interest-bearing liabilities Savings deposits $ 37,909 580 1.53 $ 38,536 853 2.21 $ 45,358 805 1.77 Interest-bearing demand deposits 94,186 2,201 2.34 67,853 2,231 3.29 45,679 1,121 2.45 Time deposits 227,270 12,598 5.54 247,254 14,605 5.91 203,180 10,677 5.25 Short-term borrowings 23,061 925 3.55 10,996 612 5.57 1,173 76 6.48 Long-term debt 78,608 4,666 5.94 75,168 4,998 6.65 55,934 3,086 5.52 ------ ----- ---- ------ ----- ---- ------ ----- ---- Total interest-bearing liabilities 461,034 20,970 4.52 439,807 23,299 5.30 351,324 15,765 4.49 ------- ------- ------- Noninterest-bearing liabilities Demand deposits 41,915 40,254 43,258 Other liabilities 4,487 4,236 3,615 Stockholders' equity 34,073 30,482 30,162 ------ ------ ------ Total liabilities and stockholders' equity $541,509 $514,779 $428,359 -------- -------- -------- Net interest income $19,807 $18,654 $15,132 ------- ------- ------- Net interest income as a percent of interest-bearing assets 3.94% 3.91% 3.86% ---- ---- ----
(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 $2,820,000, $1,852,000, and $1,165,000 in 2001, 2000, and 1999, 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, 2001. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 16 HORIZON BANCORP & SUBSIDIARIES
2001 - 2000 2000 - 1999 INCREASE/(DECREASE) INCREASE/(DECREASE) ----------------------------------------------------------------------------------- CHANGE CHANGE CHANGE CHANGE TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO CHANGE VOLUME RATE CHANGE VOLUME RATE - ----------------------------------------------------------------------------------------------------------------------------------- Interest Income Loans - total $ (579) $ 2,336 $ (2,915) $ 11,249 $ 8,499 $ 2,750 Taxable investment securities (786) (486) (300) 224 (8) 232 Nontaxable investment securities 101 102 (1) (154) (146) (8) Interest-bearing balances and money market investments 1 0 1 (10) (15) 5 Federal funds sold 87 175 (88) (253) (351) 98 -------- -------- -------- -------- -------- -------- Total interest income (1,176) 2,127 (3,303) 11,056 7,979 3,077 -------- -------- -------- -------- -------- -------- Interest Expense Savings deposits (273) (14) (259) 48 (132) 180 Interest-bearing demand deposits (30) 722 (752) 1,110 653 457 Time deposits (2,007) (1,139) (868) 3,928 2,499 1,429 Short-term borrowings 313 597 (285) 536 548 (12) Long-term debt (332) 221 (553) 1,912 1,198 714 -------- -------- -------- -------- -------- -------- Total interest expense (2,329) 389 (2,718) 7,534 4,766 2,768 -------- -------- -------- -------- -------- -------- Net Interest Earnings $ 1,153 $ 1,738 $ (585) $ 3,522 $ 3,213 $ 309 ======== ======== ======== ======== ======== ========
Horizon's average earning assets were $502.313 million in 2001 compared to $477.056 million in 2000 and $392.199 million in 1999. The net interest margin for 2001 was 3.94% compared to 3.91% and 3.86% in 2000 and 1999, respectively. The year 2001 saw unprecedented declines in interest rates, which lowered the yield on interest earning assets. Horizon lowered its deposit rates accordingly and funded short term rate sensitive assets with short term borrowings to maintain its net interest margin. The increase in net interest income during 2001 is primarily the result of increased loan volume, particularly in the mortgage warehouse division where growth came as a result of the low mortgage rates which caused a home mortgage refinance boom. The increase in net interest margin from 1999 to 2000 is primarily a result of increased volume and rate in the loan portfolios. NONINTEREST INCOME The major components of noninterest income consist of service charges on deposit accounts, gain on sale of loans held for sale 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 $2.362 million, $2.028 million and $2.048 million, for 2001, 2000 and 1999, respectively. The increase in service charges in 2001 is the result of a new overdraft protection product, offered to certain qualified deposit customers. Gain on sale of loans was $2.366 million for 2001 compared to $268 thousand in 2000 and $19 thousand for 1999. The 2001 amount includes approximately $184 thousand gain on the sale of portfolio loans while the 2000 amount includes approximately $147 thousand loss on the sale of portfolio loans. Portfolio loans were sold to reduce the interest rate risk related to a long term fixed rate asset. The majority of the 2001 increase however, relates to an increase in the volume of residential mortgage loans originated for sale. During 2001 approximately $172 million of residential mortgages were originated for sale into the secondary market compared to approximately $48 million in 2000. This volume increase resulted from the above mentioned refinance boom. This also caused a decrease in the Bank's portfolio of residential mortgage loans as a portion of portfolio loans also refinanced and the Bank opted to sell these new loans into the secondary market as well. Fiduciary fees were $2.640 million in 2001 compared to $2.728 million in 2000 and $2.113 million in 1999. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 17 NONINTEREST EXPENSE Noninterest expense totaled $21.106 million in 2001 compared to $17.905 million in 2000 and $19.430 million in 1999. In 1999 noninterest expense was adversely impacted by the expense related to the termination of the ESOP. Salaries and benefits increased 29.5% during 2001 compared to a decrease of 1.1% during 2000. The increase for 2001 was caused primarily by two factors: 1) Commission expense paid to mortgage loan originators increased by $840 thousand due to the increase in volume of new mortgage loans; 2) Expense related to vested stock appreciation rights outstanding increased $1.219 million due to the 144% increase in Horizon's stock price. Total other expenses increased 5.86% in 2001 and 13.76% in 2000. The primary factors causing the increase in 2001 were: 1) $205 thousand increase in legal expense related to the Shareholder Value Plan and issues involving employee benefit plans; 2) $281 thousand increase in loan expense related to the increased loan volume. The primary factors in the increase of the 2000 expenses were: 1) $80 thousand increase in professional fees; 2) $144 thousand increase in outside services and consultant fees; 3) $75 thousand increase in loan expense and; 4) $57 thousand increase in advertising expense. INCOME TAXES Income tax expense, before discontinued operations, totaled $2.592 million in 2001, $1.812 million in 2000 and $675 thousand in 1999. The effective tax rate was 38.59%, 32.39%, and 139.46% for 2001, 2000, and 1999, respectively. The effective tax rate is high in 1999 because the majority of the ESOP termination expenses were not tax deductible. Excluding that expense, the effective tax rate for 1999 would have been 26.40%. 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 2001, cash flows were generated primarily from an increase in deposits of $33 million, increases in borrowings from the FHLB of $30 million and a decrease in investment securities of $4 million. Cash flows were used for a $75 million increase in loans and a $12 million decrease in short term borrowings. The net cash and cash equivalent position declined by $16 million during 2001. 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 to 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, 2001, MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 18 HORIZON BANCORP & SUBSIDIARIES the amount of assets repricing with one year were approximately 150% of the amount of liabilities repricing within the same time period. This compares to 79% at December 31, 2000. This shift was caused by the increase in mortgage warehouse loans which reprice immediately when prime rate changes. This volume of loans will decline as the refinance boom fades, bringing this ratio back in line.
RATE SENSITIVITY ---------------------------------------------------- >3 MONTHS >6 MONTHS GREATER 3 MONTHS AND <6 AND <1 THAN 1 AS OF DECEMBER 31, 2001 OR LESS MONTHS YEAR YEAR TOTAL - ------------------------------------------------------------------------------------------------------- Loans $276,108 $ 22,713 $ 38,691 $ 136,105 $473,617 Money market investments Interest-bearing balances with Banks 247 247 Investment securities and FRB and FHLB stock 15,198 3,167 2,244 53,467 74,076 Other assets 40,005 40,005 -------- -------- -------- --------- -------- Total assets $291,553 $ 25,880 $ 40,935 $ 229,577 $587,945 -------- -------- -------- --------- -------- Noninterest-bearing deposits $ 3,588 $ 3,587 $ 7,175 $ 29,003 $ 43,353 Interest-bearing deposits 46,243 58,646 70,539 200,818 376,246 Borrowed funds 15,051 21,036 12,790 78,760 127,637 Other liabilities 5,766 5,766 Stockholders' equity 34,943 34,943 -------- -------- -------- --------- -------- Total liabilities and stockholders' equity $ 64,882 $ 83,269 $ 90,504 $ 349,290 $587,945 -------- -------- -------- --------- -------- GAP $226,671 $(57,389) $(49,569) $(119,713) Cumulative GAP $226,671 $169,282 $119,713
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 72% 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. 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 that 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. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 19 The table, which follows, provides information about Horizon's financial instruments that are sensitive to changes in interest rates as of December 31, 2001. Horizon had no derivative financial instruments or trading portfolio as of December 31, 2001. 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. QUANTITATIVE DISCLOSURE OF MARKET RISK
2007 & Fair Value 2002 2003 2004 2005 2006 Beyond Total 12/31/01 - ---------------------------------------------------------------------------------------------------------------------------------- Rate-sensitive assets Fixed interest rate loans $ 46,263 $ 21,257 $ 18,267 $ 14,836 $ 10,539 $ 55,628 $166,790 $168,120 Average interest rate 8.19% 8.39% 8.32% 8.22% 7.98% 7.65% 8.01% Variable interest rate loans 291,249 2,853 4,411 1,985 562 5,767 306,827 308,226 Average interest rate 6.41% 7.71% 7.59% 7.90% 7.38% 7.44% 6.47% Total loans 337,512 24,110 22,678 16,821 11,101 61,395 473,617 476,346 Average interest rate 6.66% 8.31% 8.17% 8.18% 7.95% 7.63% 7.01% Securities, including FRB and FHLB stock 20,609 9,114 2,212 3,273 5,598 33,270 74,076 74,076 Average interest rate 6.20% 6.08% 6.41% 6.66% 5.82% 5.83% 6.08% Other interest-bearing assets 247 247 247 Average interest rate 4.55% 4.55% Total earnings assets 358,368 33,224 24,890 20,094 16,699 94,665 547,940 550,669 Average interest rate 6.63% 7.70% 8.01% 7.93% 7.23% 6.99% 6.88% Rate-sensitive liabilities Noninterest-bearing deposits $ 14,350 $ 8,806 $ 6,132 $ 4,270 $ 2,974 $ 6,821 $ 43,353 $ 43,353 NOW accounts 36,447 26,868 19,291 13,593 9,601 27,232 133,032 120,700 Average interest rate 1.49% 1.63% 1.62% 1.62% 1.63% 1.64% 1.59% Savings and money market accounts 15,442 10,603 7,215 4,900 3,359 7,939 49,458 46,217 Average interest rate 1.30% 1.31% 1.28% 1.25% 1.22% 1.17% 1.27% Certificates of deposit 123,539 28,339 37,557 4,321 193,756 195,239 Average interest rate 4.86% 4.33% 4.64% 4.30% 4.73% Total deposits 189,778 74,616 70,195 27,084 15,934 41,992 419,599 405,509 Average interest rate 3.55% 2.42% 3.06% 1.73% 1.24% 1.28% 2.84% Fixed interest rate borrowings 30,097 20,055 15,039 20,028 10,018 57 95,294 97,002 Average interest rate 4.49% 5.00% 6.19% 4.82% 5.31% 7.49% 5.02% Variable interest rate borrowings 18,781 3,770 2,709 1,907 1,347 3,829 32,343 30,896 Average interest rate 1.98% 1.53% 1.53% 1.53% 1.53% 1.53% 1.79% Total funds 238,656 98,441 87,943 49,019 27,299 45,878 547,236 533,407 Average interest rate 3.55% 2.91% 3.55% 2.98% 2.75% 1.31% 3.16%
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) 20 HORIZON BANCORP & SUBSIDIARIES NEW ACCOUNTING PRONOUNCEMENTS Accounting for a Business Combination. Statement of Financial Accounting Standards ("SFAS") No.141 requires that all business combinations be accounted for using the purchase method of accounting; use of the pooling method is prohibited. A business combination occurs when an enterprise acquires all or a portion of the net assets that constitutes a business or equity interests of one or more other enterprises and obtains control over the enterprise or enterprises. All two-party and multi-party business combinations, including "roll-up" and "put-together" transactions are included in the scope of this Statement. This Statement requires that goodwill be initially recognized as an asset in the financial statement and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. The provisions of Statement No. 141 are effective for any business combination that is initiated after June 30, 2001. Accounting for Goodwill. Under the provisions SFAS No. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. Impairment test of goodwill should be done on an annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process. The first step is a comparison of the fair value of a reporting unit to its carrying amount including goodwill. If the fair value of the reporting unit is greater than its carrying value, goodwill is not impaired and no further work is required. Companies should perform the first step of the impairment test on all goodwill within six months of initially applying the Statement. If the fair value is less, the second step should be performed. The second step is to compare the fair value of goodwill to its carrying amount. If the fair value of goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. The provisions of Statement No. 142 are effective for fiscal years beginning December 15, 2001. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001, but before this Statement is initially applied would be accounted for in accordance with the amortization and nonamortization provisions of the Statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. The Company will adopt these new accounting rules on January 1, 2002. As a result, the Company will no longer amortize the goodwill that it recorded on certain acquisitions prior to June 30, 2001, but will make an annual assessment of any impairment in goodwill and, if necessary, recognize an impairment loss at that time. The Company had goodwill of $1.0 million at December 31, 2001, and goodwill amortization of $90 thousand for the year ended December 31, 2001. 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. MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS & FINANCIAL CONDITION (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 21 [Photo] Financial Statements Consolidated Financial Statements Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . .26 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .27 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 28 Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . .45 Other Information Management's Report on Financial Statements . . . . . . . . . . . . . . . . 46 Horizon's Common Stock and Related Stockholders' Matters . . . . . . . . . .47 23 HORIZON BANCORP Consolidated Balance Sheets(Dollar Amounts In Thousands)
DECEMBER 31 2001 2000 --------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 18,608 $ 34,018 Interest-bearing demand deposits 20 1,033 ------ ----- Cash and cash equivalents 18,628 35,051 Interest-bearing deposits 247 238 Investment securities available for sale 67,338 71,375 Loans held for sale 6,816 4,176 Loans, net of allowance for loan losses of $5,410 and $4,803 461,391 388,775 Premises and equipment 16,197 17,281 Federal Reserve and Federal Home Loan Bank stock 6,738 6,239 Interest receivable 3,209 3,301 Other assets 7,381 5,340 ------ ----- Total assets $587,945 $531,776 ======== ======== Liabilities Deposits Noninterest bearing $ 43,353 $ 30,044 Interest bearing 376,246 356,304 ------ ----- Total deposits 419,599 386,348 Short-term borrowings 22,344 34,148 Federal Home Loan Bank advances 105,293 75,320 Interest payable 765 1,015 Other liabilities 5,001 3,321 ------ ----- Total liabilities 553,002 500,152 ======= ======= Commitments and Contingencies Equity Received from Contributions and Dividends to the Stock Bonus Plan -- 6,676 ------ ----- Stockholders' Equity Common stock, $.33 1/3 stated value Authorized, 15,000,000 shares Issued, 3,115,284 shares, less Stock Bonus Plan shares of 394,956 in 2000 1,038 907 Additional paid-in capital 20,808 14,263 Retained earnings 28,130 25,184 Accumulated other comprehensive income 430 9 Treasury stock, at cost, 1,129,587 and 1,126,650 shares (15,463) (15,415) ------ ------ Total stockholders' equity 34,943 24,948 ------ ----- Total liabilities and stockholders' equity $587,945 $531,776 ======== ========
See notes to consolidated financial statements. FINANCIAL STATEMENTS 24 HORIZON BANCORP & SUBSIDIARIES HORIZON BANCORP
Consolidated Statements of Income(Dollar Amounts In Thousands Except Per Share Data) YEAR ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- Interest Income Loans receivable $36,304 $36,883 $ 25,634 Investment securities Taxable 4,359 5,057 5,096 Tax exempt 114 13 167 ------ ------ ------ Total interest income 40,777 41,953 30,897 ------ ------ ------ Interest Expense Deposits 15,975 17,689 12,603 Federal funds purchased and short-term borrowings 329 612 76 Federal Home Loan Bank advances 4,666 4,998 3,086 ------ ------ ------ Total interest expense 20,970 23,299 15,765 ------ ------ ------ Net Interest Income 19,807 18,654 15,132 Provision for loan losses 1,505 2,010 1,100 ------ ------ ------ Net Interest Income After Provision for Loan Losses 18,302 16,644 14,032 ------ ------ ------ Other Income Service charges on deposit accounts 2,362 2,028 2,048 Wire transfer fee income 557 479 91 Fiduciary activities 2,640 2,728 2,113 Gain on sale of mortgage loans 2,366 268 19 Gain on sale of securities 2 177 Commission income from insurance agency 849 812 811 Other income 745 541 619 ------ ------ ------ Total other income 9,521 6,856 5,878 ------ ------ ------ Other Expenses Salaries and employee benefits 11,801 9,115 9,017 ESOP termination expense 2,073 Net occupancy expenses 1,725 1,733 1,692 Data processing and equipment expenses 2,177 2,077 2,079 Other expenses 5,403 4,980 4,565 ------ ------ ------ Total other expenses 21,106 17,905 19,426 ------ ------ ------ Income Before Income Tax 6,717 5,595 484 Income tax expense 2,592 1,812 675 ------ ------ ------ Net Income (Loss) From Continuing Operations 4,125 3,783 (191) ------ ------ ------ Discontinued Operations Loss from operation of discontinued subsidiary (less tax benefit of $56) (81) Loss on disposal of subsidiary, including provision of $134 for operating losses during phase-out period (less tax benefit of $52) (82) --- Total loss from discontinued operations (163) ---- Net Income (Loss) $ 4,125 $ 3,783 $ (354) ======= ======= ====== Basic & diluted earnings (loss) per share from continuing operations $ 2.08 $ 1.85 $ (.10) Basic & diluted earnings (loss) per share from loss on discontinued operations (.08) ------- ------- ------ Basic and Diluted Earnings (Loss) per Share $ 2.08 $ 1.85 $ (.18) ======= ======= ======
See notes to consolidated financial statements. FINANCIAL STATEMENTS HORIZON BANCORP & SUBSIDIARIES 25 HORIZON BANCORP Consolidated Statements of Stockholders' Equity (Dollar Amounts In Thousands) ACCUMULATED
ADDITIONAL OTHER COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL INCOME (LOSS) EARNINGS INCOME (LOSS) STOCK TOTAL - ------------------------------------------------------------------------------------------------------------------------ Balances, January 1, 1999 $741 $ 8,834 $24,201 $ 336 $ (6,644) $27,468 Net loss $ (354) (354) (354) Other comprehensive loss, net of tax, unrealized losses on securities, net of reclassification adjustment (1,537) (1,537) (1,537) Comprehensive loss $(1,891) Cash dividends ($.60 per share) (1,218) (1,218) Purchase of 501,735 shares of treasury stock (7,619) (7,619) Issuance of 12,000 shares of common stock for purchase of investment management entity 4 196 200 Net purchases and distributions with ESOP 128 4,058 4,186 Tax benefit of ESOP dividend deduction 65 65 -- -- Balances, December 31, 1999 873 13,153 22,629 (1,201) (14,263) 21,191 Net income $ 3,783 3,783 3,783 Other comprehensive income, net of tax, unrealized gains on securities 1,210 1,210 1,210 ------- Comprehensive income $ 4,993 ------- Cash dividends ($.60 per share) (1,228) (1,228) ------ Purchase of 80,199 shares of treasury stock (1,200) (1,200) Re-issuance of 4,428 shares of common stock for partial payment of directors fees 12 48 60 Net purchases and distributions with Stock Bonus Plan 34 1,098 1,132 -- ----- ----- Balances, December 31, 2000 907 14,263 25,184 9 (15,415) 24,948 Net income $ 4,125 4,125 4,125 Other comprehensive income, net of tax, unrealized gains on securities 421 421 421 ------- Comprehensive income $ 4,546 ------- Cash dividends ($.60 per share) (1,179) (1,179) Purchase of 2,937 shares of treasury stock (48) (48) Transfer of Stock Bonus Plan shares to equity 131 6,545 6,676 --- ----- ------- ------- -------- ----- Balances, December 31, 2001 $1,038 $20,808 $28,130 $ 430 $(15,463) $34,943 ====== ======= ======= ======= ======== =======
See notes to consolidated financial statements. FINANCIAL STATEMENTS 26 HORIZON BANCORP & SUBSIDIARIES HORIZON BANCORP Consolidated Statements of Cash Flows (Dollar Amounts In Thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ 4,125 $ 3,783 $ (354) Adjustments to reconcile net income (loss) to net cash provided by operating activities Provision for loan losses 1,505 2,010 1,100 Additional paid-in capital from release of ESOP shares 1,807 Depreciation and amortization 1,476 1,445 1,409 Deferred income tax (808) (157) (98) Discontinued operations 237 Gain on sale of loans (2,366) (268) (19) Proceeds from sales of loans 148,988 33,265 11,993 Loans originated for sale (149,262) (37,173) Other adjustments 51 (151) 191 Net change in Interest receivable 92 (521) (531) Interest payable (250) 95 103 Other assets (1,417) (813) 1,586 Other liabilities 1,680 412 (141) ----- ----- ------ Net cash provided by operating activities 3,814 1,927 17,283 ----- ----- ------ Investing Activities Purchases of securities available for sale (24,142) (13,321) (35,250) Proceeds from maturities, calls, and principal repayments of securities available for sale 28,384 11,718 17,708 Proceeds from sales of securities available for sale 317 11,738 Proceeds from maturities, calls, and principal repayments of securities held to maturity 1,785 Net change in loans (74,619) 245 (117,265) Principal payments received on ESOP loan 5,769 Proceeds from sale of fixed assets 23 715 Recoveries on loans previously charged-off 683 334 363 Purchases of premises and equipment (545) (651) (2,070) Purchase of Federal Reserve and Federal Home Loan Bank stock (499) (342) (1,924) Other investing activities (9) (6) 193 ----- ----- ------ Net cash used by investing activities (70,430) (2,000) (118,238) ----- ----- ------ Financing Activities Net change in Deposits 33,251 22,680 41,267 Short-term borrowings (11,804) 9,648 20,500 Federal Home Loan Bank advances 212,000 50,320 66,000 Repayment of Federal Home Loan Bank advances (182,027) (80,000) (15,000) Dividends paid (1,179) (1,228) (1,218) Re-issuance of treasury stock 60 Purchase of treasury stock (48) (1,200) (7,619) ----- ----- ------ Net cash provided by financing activities 50,193 280 103,930 ----- ----- ------ Net Change in Cash and Cash Equivalents (16,423) 207 2,975 Cash and Cash Equivalents, Beginning of Year 35,051 34,844 31,869 ----- ----- ------ Cash and Cash Equivalents, End of Year $ 18,628 $ 35,051 $ 34,844 ======== ========= ======== Additional Cash Flows Information Interest paid $ 21,220 $ 23,394 $ 15,868 Income tax paid 2,540 2,150 350
See notes to consolidated financial statements. FINANCIAL STATEMENTS HORIZON BANCORP & SUBSIDIARIES 27 HORIZON BANCORP Notes to Consolidated Financial Statements 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 accounting principles generally accepted in the United States of America 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: Horizon Trust & Investment Management, Inc. (HTIM) and Horizon Insurance Services, Inc (Insurance Agency). HTIM 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 three 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 a discontinued operation and sold its loan portfolio to another finance company in August 1999. 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 accounting principles generally accepted in the United States of America 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 designates its 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. LOANS HELD FOR SALE -- Loans held for sale are reported at the lower of cost or market value in the aggregate. INTEREST AND FEES ON LOANS -- Interest on commercial, mortgage, and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured and it is in the process of collection, or when serious doubt exists as to the 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 and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 22% 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 17% of the loan NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 28 HORIZON BANCORP & SUBSIDIARIES portfolio and are secured by both commercial and residential real estate. Installment loans make up approximately 17% of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 44% of the loan portfolio and are secured by residential real estate. MORTGAGE WAREHOUSE LOANS -- Horizon purchases residential mortgage loans from various mortgage companies prior to sale of these loans by the mortgage companies in the secondary market. Horizon held loans to individuals that were purchased under agreements to resell from 30 approved mortgage companies at December 31, 2001. Horizon purchases such loans from mortgage companies, net of certain fees, and later sells them back to the mortgage companies at the same amount and without recourse provisions. As a result, no gains and losses are recorded at the resale of loans. Horizon records interest and fee income on the loans during the funding period. Horizon uses the stated interest rate in the agreement with each mortgage company for interest income recognition, and not the interest rates on the individual loans. Horizon does not retain servicing of the loans when they are resold. Loans consist of purchase money and refinance mortgage loans and are generally held no more than 90 days by Horizon and are typically resold within 30 days. ALLOWANCE FOR LOAN LOSSES -- An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of chargeoffs, net of recoveries. Horizon's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on a historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. Specific allowances are established in cases where management has identified conditions or circumstances related to a credit that management believes indicate the probability that a loss will be incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance may include factors such as local, regional, and national economic conditions and forecasts, and adequacy of loan policies and internal controls, the experience of the lending staff, bank regulatory examination results, and changes in the composition of the portfolio. 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 the 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 29 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 while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations. FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK -- The stock is a required investment 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. SERVICING RIGHTS -- Servicing rights represent both purchased rights and the allocated value of servicing rights retained on mortgage 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. INCOME TAXES -- Horizon files annual consolidated income tax returns with its subsidiaries. Income tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. TRUST ASSETS AND INCOME -- Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon. EARNINGS PER COMMON SHARE AND DIVIDENDS DECLARED PER COMMON SHARE -- Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. 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 outstanding stock options are 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. The number of shares used in the computation of basic and diluted earnings per share is 1,985,458 for 2001, 2,048,649 for 2000, and 1,966,173 for 1999. 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. Total stockholder's equity for the Bank at December 31, 2001, was $36,129,758 of which $29,046,325 was restricted from dividend distribution to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines. CONSOLIDATED STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and cash equivalents 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. STOCK SPLIT -- On October 16, 2001, the Board of Directors of the Company declared a three for one stock split. All share and per share amounts have been adjusted to give effect for the stock split. RECLASSIFICATIONS -- Certain reclassifications have been made to the 2000 and 1999 financial statements to be comparable to 2001. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 30 HORIZON BANCORP & SUBSIDIARIES NOTE 2-- INVESTMENT SECURITIES
2001 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------- Available for sale U. S. Treasury and federal agencies $20,255 $ 122 $ (59) $20,318 State and municipal 15,411 277 (378) 15,310 FHLMC mortgage-backed securities 4,979 98 (5) 5,072 FNMA mortgage-backed securities 8,833 212 9,045 GNMA collateralized mortgage obligations 8,000 (15) 7,985 FHLMC collateralized mortgage obligation 7,737 419 8,156 FNMA collateralized mortgage obligations 1,413 50 (11) 1,452 ----- -- --- ----- Total investment securities $66,628 $1,178 $ (468) $67,338 ======= ====== ====== =======
2000 ------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------- Available for sale U. S. Treasury and federal agencies $26,171 $ 35 $(204) $26,002 State and municipal 5,564 134 (2) 5,696 FHLMC mortgage-backed securities 5,598 63 (16) 5,645 FNMA mortgage-backed securities 13,252 57 (20) 13,289 GNMA collateralized mortgage obligations 8,026 (238) 7,788 FHLMC collateralized mortgage obligation 7,725 227 7,952 FNMA collateralized mortgage obligations 4,707 55 4,762 Marketable equity securities 315 (74) 241 --- --- --- Total investment securities $71,358 $ 571 $(554) $71,375 ======= ====== ====== =======
The amortized cost and fair value of securities available for sale at December 31, 2001, 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. AMORTIZED FAIR COST VALUE - --------------------------------------------------------------------------- Within one year $ 3,038 $ 3,076 One to five years 7,633 7,829 Five to ten years 11,673 11,818 After ten years 13,322 12,905 -------------------- 35,666 35,628 Mortgage-backed securities 13,812 14,117 Collateralized mortgage obligations 17,150 17,593 -------------------- Totals $66,628 $67,338 ==================== Securities with a carrying value of $20,669,000 and $20,174,000 were pledged at December 31, 2001 and 2000, to secure certain public and trust deposits and securities sold under agreements to repurchase. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 31 Proceeds from sales of securities available for sale during 2001 were $317,000. Gross gains of $2,000 were realized on these sales. There were no sales of securities available for sale during 2000. Proceeds from sales of securities available for sale during 1999 were $11,738,000. Gross gains of $217,000 and gross losses of $40,000 were realized on these sales. During the second quarter of 1999 debt securities with an amortized cost of $10,050,000 were transferred from held to maturity to available for sale so the Bank could minimize the tax consequences of holding tax-exempt securities. The securities had an unrealized gain of approximately $350,000. There were no transfers between classifications during 2001 or 2000. NOTE 3-- LOANS AND ALLOWANCE DECEMBER 31 2001 2000 - ------------------------------------------------------------------------------ Commercial loans $ 100,912 $ 88,421 Mortgage warehouse loans 205,511 102,884 Real estate loans 80,571 125,431 Installment loans 79,807 76,842 ------ ------ 466,801 393,578 Allowance for loan losses (5,410) (4,803) ------ ------ Total loans $ 461,391 $ 388,775 ========= ========= DECEMBER 31 2001 2000 1999 - ------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $4,803 $3,273 $2,787 Provision for losses 1,505 2,010 1,100 Provision for losses, discontinued operations 250 Recoveries on loans 683 334 363 Loans charged off (1,581) (814) (1,227) ------ ---- ------ Balances, December 31 $5,410 $4,803 $3,273 ====== ====== ====== Impaired loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $1,028,000 and $609,000 at December 31, 2001 and 2000, respectively. No loans were considered impaired during 1999. The allowance for impaired loans, included in the Bank's allowance for loan losses, totaled $242,000 and $40,000 at December 31, 2001 and 2000, respectively. The average balance of impaired loans during 2001 was $1,168,000 and $609,000 during 2000. There was $44,000 of interest income recorded and received during 2001 and no interest income was recorded or received during 2000. At December 31, 2001 and 2000, loans past due more than 90 days and still accruing interest totaled approximately $128,000 and $699,000. Loans on which the recognition of interest has been discontinued or reduced totaled approximately $1,772,000, $2,487,000, and $1,173,000 at December 31, 2001, 2000, and 1999. Interest income not recognized on these loans totaled approximately $129,000, $241,000, and $62,000 in 2001, 2000, and 1999. Loans to directors and executive officers of Horizon and the Bank, including associates of such persons, amounted to $6,418,000 and $5,434,000, as of December 31, 2001 and 2000. During 2001 new loans or advances were $4,678,000 and loan payments were $3,694,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 32 NOTE 4-- PREMISES AND EQUIPMENT DECEMBER 31 2001 2000 - -------------------------------------------------------------------------- Land $ 3,206 $ 3,206 Buildings and improvements 16,536 16,680 Furniture and equipment 8,264 8,323 ----- ----- Total cost 28,006 28,209 Accumulated depreciation (11,809) (10,928) ----- ----- Net $ 16,197 $17,281 ======== ======= NOTE 5-- LOAN SERVICING Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $106,140,000 and $53,169,000 at December 31, 2001 and 2000. The Bank began capitalizing mortgage servicing rights during 2000 and the aggregate fair value of capitalized mortgage servicing rights at December 31, 2001, totaled approximately $1,005,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights. 2001 2000 - -------------------------------------------------------------------------- Mortgage Servicing Rights Balances, January 1 $ 316 $ 0 Servicing rights capitalized 688 333 Amortization of servicing rights (112) (17) ------ ----- Balances, December 31 $ 892 $ 316 ====== ===== NOTE 6 -- DEPOSITS DECEMBER 31 2001 2000 - ---------------------------------------------------------------------------- Noninterest bearing demand deposits $ 43,353 $ 30,044 Interest bearing demand deposits 133,113 93,432 Money market (variable rate) 16,826 2,124 Savings deposits 32,632 32,196 Certificates of deposit of $100,000 or more 45,334 68,914 Other certificates and time deposits 148,341 159,638 ------- ------- Total deposits $419,599 $386,348 ======== ======== Certificates and other time deposits maturing in years ending December 31 are as follows: 2002 $123,341 2003 27,317 2004 38,696 2005 4,301 2006 20 -------- $193,675 ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 33 NOTE 7 -- SHORT-TERM BORROWINGS DECEMBER 31 2001 2000 - -------------------------------------------------------------------------------- Federal funds purchased $ 2,000 $ 14,700 Securities sold under agreements to repurchase 18,344 16,698 Notes payable, unsecured 2,000 2,750 ----- ----- Total short-term borrowings $ 22,344 $ 34,148 ======== ======== Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by U.S. agency and mortgage-backed securities and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 2001 and 2000 totaled $18,358,000 and $16,698,000 and the daily average of such agreements totaled $16,495,000 and $2,590,000. The agreements at December 31, 2001, are due on demand. Horizon has an unsecured $5,000,000 line of credit, of which $2,000,000 was outstanding at December 31, 2001. The loan is from an unrelated financial institution with interest payable quarterly at a rate indexed to LIBOR. The note matures within one year. At December 31, 2001, the Bank has available approximately $29,000,000 in credit lines with various money center banks. NOTE 8-- FHLB ADVANCES DECEMBER 31 2001 2000 - ------------------------------------------------------------------------------- Federal Home Loan Bank advances, variable and fixed rates, due at various dates through May 15, 2020 $105,293 $75,320 ======== ======= The Federal Home Loan Bank advances are secured by first-mortgage loans and investment securities totaling approximately $323,543,000. Advances are subject to restrictions or penalties in the event of prepayment. Contractual maturities in years ending December 31 2002 $40,029 2003 20,032 2004 15,034 2005 37 2006 40 Thereafter 30,121 ------ $105,293 ======== NOTE 9-- EMPLOYEE STOCK BONUS PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN Horizon maintains an employee stock bonus plan (Stock Bonus Plan) that covers substantially all employees. The Stock Bonus Plan is noncontributory and Horizon may make discretionary matching contributions and regular contributions. Employee voluntary contributions are vested at all times and Horizon's contributions vest over a six year period. Prior to the establishment of the Stock Bonus Plan, Horizon maintained an employee stock ownership plan. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 34 HORIZON BANCORP & SUBSIDIARIES On July 20, 1999, the Board of Directors of Horizon Bancorp authorized the termination of the Horizon Bancorp Employee Stock Ownership Plan (ESOP). On December 31, 1999, the debt owed by the ESOP was repaid with the proceeds from the sale of a portion of the unallocated shares to Horizon. The remaining shares for all active participants were allocated to participants. The expense related to the termination of the ESOP totaled $2,073,000 in 1999. The retirement plans of Horizon own approximately 19% of the outstanding shares. The remaining shares in the ESOP plan were transferred to the Stock Bonus Plan. Prior to 2001 the Stock Bonus Plan's equity was classified outside of shareholders' equity. In 2001 Horizon's common shares became listed on a national market system. Since the shares in the Stock Bonus Plan are now readily marketable, Horizon reclassified the Stock Bonus Plan equity to shareholders' equity during 2001. Total cash contributions and expense recorded during the years 2001 and 2000 for the Stock Bonus Plan were $150,000 and $200,000, respectively. There were no contributions to the Stock Bonus Plan during 1999. Transactions affecting ESOP expense and cash contributions to the ESOP are as follows: DECEMBER 31 1999 - ------------------------------------------------------------------- Dividends paid on unallocated ESOP shares $ 200 Market value increase of shares released 1,807 Other contributions 793 Total ESOP expense included in ESOP termination expense and salaries and benefits $ 2,800 Total cash contributions made to ESOP during the year $ 793 Below are the transactions affecting the Stock Bonus Plan / ESOP equity accounts:
ADDITIONAL UNALLOCATED COMMON PAID-IN ESOP STOCK CAPITAL SHARES TOTAL --------------------------------------------- Balances, January 1, 1999 $ 293 $ 9,894 $(5,769) $ 4,418 Market value increase in ESOP shares released 1,807 1,807 Loan repayments 5,769 5,769 Sale of stock, at cost (108) (3,749) (3,857) Net ESOP share purchases and distributions (20) (309) (329) --- ---- ---- ---- Balances, December 31, 1999 165 7,643 0 7,808 Net Stock Bonus Plan share purchases and distributions (34) (1,098) (1,132) --- ---- ---- ---- Balances, December 31, 2000 131 6,545 0 6,676 Transfer of Stock Bonus Plan shares to equity (131) (6,545) (6,676) --- ---- ---- ---- Balances, December 31, 2001 $ 0 $ 0 $ 0 $ 0 ===== ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 35 NOTE 10-- EMPLOYEE THRIFT PLAN The Employee Thrift Plan (Plan) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times and Horizon's contributions vest over a six-year period. The Bank's 2001, 2000, and 1999 expense related to the thrift plan totaled $203,000, $201,000, and $196,000. NOTE 11-- OTHER EXPENSES YEAR ENDED DECEMBER 31 2001 2000 1999 - ---------------------------------------------------------------------------- Supplies and printing $ 314 $ 289 $ 311 Advertising 651 511 454 Communication 703 628 622 Professional fees 1,037 826 746 Training 108 107 87 Outside services and consultants 678 776 632 Reinsurance company 48 69 95 Loan expenses 631 350 275 Goodwill amortization 90 90 87 Directors fees 224 191 207 Insurance expense 234 212 197 Loss on disposal of fixed assets 153 36 219 Other 532 895 633 --- --- --- Total other expenses $5,403 $4,980 $4,565 ====== ====== ====== NOTE 12-- INCOME TAX YEAR ENDED DECEMBER 31 2001 2000 1999 - --------------------------------------------------------------------------- Income tax expense Currently payable Federal $2,791 $1,526 $552 State 609 443 221 Deferred (808) (157) (98) ------ ------ ---- Total income tax expense $2,592 $1,812 $675 ====== ====== ==== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $2,284 $1,902 $165 Tax exempt interest (145) (150) (220) Nondeductible and other (51) (32) (28) Nondeductible ESOP expense 612 Effect of state income taxes 402 292 146 Decrease in valuation allowance (200) ------ ------ ---- Actual tax expense $2,592 $1,812 $675 ====== ====== ==== Tax expense applicable to securities gains for 2001 and 1999 was $792 and $70,110. There were no security sales in 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 36 HORIZON BANCORP & SUBSIDIARIES A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows: DECEMBER 31 2001 2000 - ------------------------------------------------------------------------------- Assets Allowance for loan losses $1,626 $ 1,033 Accrued operating expenses 66 69 Loan fees 42 58 Director and employee benefits 543 315 --- --- Total assets 2,277 1,475 ===== ===== Liabilities Depreciation (659) (744) Other (84) (5) Unrealized gain on securities available for sale (280) (8) Total liabilities (1,023) (757) ------ ---- Net deferred tax asset $ 1,254 $ 718 ======== ======= The valuation allowance at December 31, 1999, was $200,000. The valuation allowance decreased $200,000 during 2000 and there was no valuation allowance at December 31, 2001 or 2000. The decrease in the valuation allowance was a result of Horizon generating taxable income in 2000 that utilized the alternative minimum tax (ATM) credit carryforward. NOTE 13-- OTHER COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31 2001 2000 1999 - ---------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year $695 $1,984 $(2,343) Less: reclassification adjustment for gains realized in net income 2 177 Net unrealized gains (losses) 693 1,984 (2,520) --- ----- ------ Tax (expense) benefit (272) (774) 983 --- ----- ------ Other comprehensive income (loss) $421 $1,210 $(1,537) ==== ====== =======
NOTE 14-- COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES Because of the nature of its activities, Horizon is subject to pending and threatened legal actions that arise in the normal course of business. In management's opinion, after consultation with counsel, none of the litigation to which Horizon or any of its subsidiaries is a party will have a material effect on the consolidated financial position or results of operations of Horizon. The Bank was required to have approximately $11,933,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2001. These balances are included in cash and cash equivalents and do not earn interest. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 37 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. At December 31, 2001 and 2000, commitments to make loans amounted to approximately $50,543,000 and $59,789,000 and commitments under outstanding standby letters of credit amounted to approximately $1,445,000 and $1,186,000. 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 15-- 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 1 capital, and Tier 1 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, 2001 and 2000, Horizon and the Bank are categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2001, that management believes have changed Horizon's or the Bank's classification. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 38 HORIZON BANCORP & SUBSIDIARIES Horizon's and the Bank's actual and required capital amounts and ratios are as follows:
MINIMUM REQUIRED TO BE WELL REQUIRED FOR CAPITALIZED(1)UNDER CAPITAL(1) ADEQUACY ACTION ACTUAL PURPOSES REQUIREMENTS --------------- ------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------ As of December 31, 2001 Total capital (1) (to risk-weighted assets) Consolidated $37,940 10.41% $29,144 8.00% N/A N/A Bank 39,127 10.78 29,000 8.00 $36,311 10.00% Tier I capital (1) (to risk-weighted assets) Consolidated 33,390 9.17 14,572 4.00 N/A N/A Bank 34,577 9.52 14,525 4.00 21,787 6.00 Tier I capital (1) (to average assets) Consolidated 33,390 5.86 22,793 4.00 N/A N/A Bank 34,577 6.07 22,771 4.00 28,464 5.00 As of December 31, 2000 Total capital (1) (to risk-weighted assets) Consolidated $34,445 10.69% $25,785 8.00% N/A N/A Bank 34,903 10.88 25,653 8.00 $32,067 10.00% Tier I capital (1) (to risk-weighted assets) Consolidated 30,406 9.43 12,893 4.00 N/A N/A Bank 30,885 9.63 12,827 4.00 19,200 6.00 Tier I capital (1) (to average assets) Consolidated 30,406 5.47 22,245 4.00 N/A N/A Bank 30,885 5.91 20,910 4.00 26,137 5.00
(1) As defined by regulatory agencies NOTE 16-- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 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 were available for grant at December 31, 2001, 2000, and 1999, however, outstanding options may be exercised until their expiration. Horizon recognizes compensation expense related to the 1987 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 recorded compensation expense related to the 1987 plan of $342,000 in 2001 and a reduction in compensation expense of $206,000 and $103,000 in 2000 and 1999. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 39 A summary of transactions for the plan follows:
SHARES --------------------- WEIGHTED- AVAILABLE OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE -------------------------------------- Balances, January 1, 1999 and 2000 0 51,300 $8.79 Exercised (900) 9.73 ------------------- Balances, December 31, 2000 0 50,400 8.87 Exercised (36,000) 10.20 ------------------- Balances, December 31, 2001 0 14,400 5.51 ===================
As of December 31, 2001, the 14,400 options outstanding have exercise prices ranging from $4.50 to $8.17 and a weighted-average remaining contractual life of 9.6 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 2000 Horizon authorized the grant of options and SARs for 47,800 shares of common stock. Horizon recorded compensation expense of $671,000 related to the 1997 plan in 2001. There was no compensation expense related to the 1997 plan in 2000 or 1999. A summary of transactions for the plan follows:
SHARES ---------------------- WEIGHTED- AVAILABLE OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------------------------------------- Balances, January 1, 1999 234,000 36,000 $20.00 Granted (81,600) 81,600 $16.43 Forfeitures ------- ------ Balances, December 31, 1999 152,400 117,600 17.33 Granted (143,400) 143,400 11.70 Forfeitures 46,800 (46,800) 15.12 ------- ------ Balances, December 31, 2000 55,800 214,200 13.92 Granted (55,800) 55,800 9.64 Forfeitures 3,000 (3,000) 16.56 ------- ------ Balances, December 31, 2001 3,000 267,000 12.96 ===== =======
As of December 31, 2001, the 267,000 options outstanding have an exercise price ranging from $9.33 to $20.00 and a weighted average remaining contractual life of 18.0 years. The options granted under the 1997 plan vest at a rate of 20% per year. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 40 HORIZON BANCORP & SUBSIDIARIES NOTE 17-- 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, 2001 and 2000. 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. NET LOANS -- The fair value of portfolio 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. The carrying amounts of loans held for sale approximate fair value. 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 41 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:
2001 2000 -------------------- ---------------------- CARRYING FAIR CARRYING FAIR DECEMBER 31 AMOUNT VALUE AMOUNT VALUE - -------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 18,628 $ 18,628 $ 35,051 $ 35,051 Interest-bearing deposits 247 247 238 238 Investment securities available for sale 67,338 67,338 71,375 71,375 Loans including loans held for sale, net 468,207 470,936 392,951 401,903 Interest receivable 3,209 3,209 3,301 3,301 Stock in FHLB and FRB 6,738 6,738 6,239 6,239 Liabilities Noninterest-bearing deposits 43,353 43,353 30,044 30,044 Interest-bearing deposits 376,246 379,093 356,304 356,700 Short-term borrowings 22,344 22,344 34,148 34,148 Federal Home Loan Bank advances 105,293 106,962 75,320 76,123 Interest payable 765 765 1,015 1,015
NOTE 18-- 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 Sheets DECEMBER 31 2001 2000 - ------------------------------------------------------------------------------ Assets Total cash and cash equivalents $ 210 $ 903 Investment in Bank 36,130 32,094 Investment in Insurance Company 469 406 Investment securities, net 241 Dividends receivable from Bank 300 Other assets 639 1,488 ------ ------ Total assets $37,748 $35,132 ======= ======= Liabilities Short-term borrowings $ 2,000 $ 2,750 Other liabilities 805 758 Equity receivable from contributions and dividends to Stock Bonus Plan 6,676 Stockholders' equity 34,943 24,948 ------ ------ Total liabilities and stockholders' equity $37,748 $35,132 ======= ======= NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 42 HORIZON BANCORP & SUBSIDIARIES
Condensed Statements of Income YEAR ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------- Operating Income (Expense) Dividend income from Bank $ 600 $2,750 $1,150 Investment income 28 39 115 Other income 26 44 16 Interest expense (165) (224) Employee benefit expense (163) (200) (2,819) Other expense (35) (85) (102) --- --- ---- Income (loss) before distributed income of subsidiaries 291 2,324 (1,640) Undistributed income of subsidiaries 3,725 1,290 820 ----- ----- --- Income (loss) before tax 4,016 3,614 (820) Income tax benefit 109 169 466 --- --- --- Net income (loss) $4,125 $3,783 $ (354) ====== ====== ======
Condensed Statements of Cash Flows YEAR ENDED DECEMBER 31 2001 2000 1999 - ---------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $4,125 $3,783 $ (354) Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in undistributed net income of Bank (3,662) (1,221) (912) Equity in undistributed net income of Insurance Company (63) (55) (71) Distributions in excess of (equity in undistributed) net income of The Loan Store (14) 163 Additional paid-in capital from release of ESOP shares 1,807 Investment securities gains (2) Change in Income taxes receivable 377 364 744 Dividends receivable from Bank (300) 300 250 Other assets 445 (412) 5,538 Other liabilities 47 (186) 127 -- ---- --- Net cash provided by operating activities 967 2,559 7,292 --- ----- ----- Investing Activities Investment in Bank (2,500) Proceeds from sales of securities available for sale 317 --- ----- ----- Net cash provided (used) by investing activities 317 (2,500) --- ----- ----- Financing Activities Dividends paid (1,179) (1,228) (1,218) Change in short-term borrowings (750) 250 2,500 Reissuance of treasury stock 60 Purchase of treasury stock (48) (1,200) (7,619) --- ----- ----- Net cash used by financing activities (1,977) (2,118) (6,337) ------ ----- ----- Net Change in Cash and Cash Equivalents (693) 441 (1,545) Cash and Cash Equivalents at Beginning of Year 903 462 2,007 --- ----- ----- Cash and Cash Equivalents at End of Year $ 210 $ 903 $ 462 ===== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) HORIZON BANCORP & SUBSIDIARIES 43 NOTE 19-- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth certain quarterly results for the years ended December 31, 2001 and 2000:
AVERAGE NET INCOME SHARES PER NET PROVISION OUTSTANDING SHARE QUARTER INTEREST INTEREST INTEREST FOR LOAN NET (BASIC AND (BASIC AND ENDED INCOME EXPENSE INCOME LOSSES INCOME DILUTED) DILUTED) - ------------------------------------------------------------------------------------------------------------------------ 03-31-01 $ 10,501 $ 6,012 $ 4,489 $ 352 $ 938 1,985,943 $ .47 06-30-01 10,443 5,545 4,898 353 1,053 1,985,784 .53 09-30-01 9,850 4,972 4,878 300 1,124 1,985,784 .57 12-31-01 9,983 4,441 5,542 500 1,010 1,984,334 .51 ----- ----- ----- --- ----- --- $ 40,777 $ 20,970 $ 19,807 $ 1,505 $ 4,125 1,985,458 $2.08 ======== ======== ======== ======= ======= ===== 03-31-00 $ 9,896 $ 5,442 $ 4,454 $ 503 $ 782 2,066,925 $ .38 06-30-00 10,287 5,453 4,834 502 1,057 2,068,266 .51 09-30-00 10,899 6,174 4,725 503 1,213 2,057,211 .59 12-31-00 10,871 6,230 4,641 502 731 2,002,596 .37 ----- ----- ----- --- ----- --------- --- $ 41,953 $ 23,299 $ 18,654 $ 2,010 $ 3,783 2,048,649 $1.85 ======== ======== ======== ======= ======= ========= =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table dollar amounts in thousands) 44 HORIZON BANCORP & SUBSIDIARIES Independent Accountants' Report To the Stockholders and Board of Directors Horizon Bancorp Michigan City, Indiana We have audited the consolidated balance sheets of Horizon Bancorp as of December 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Horizon Bancorp as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. BKD, LLP Merrillville, Indiana February 1, 2002 INDEPENDENT ACCOUNTANTS' REPORT HORIZON BANCORP & SUBSIDIARIES 45 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 accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements. In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on 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 consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters. The consolidated financial statements in the Annual Report have been audited by BKD, LLP, independent public accountants, for 2001, 2000, and 1999. Their audits were conducted in accordance with auditing standards generally accepted in the United States of America and included a consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS (Table dollar amounts in thousands) 46 HORIZON BANCORP & SUBSIDIARIES Horizon's Common Stock and Related Stockholders' Matters Horizon common stock is traded on the NASDAQ SmallCap market under the symbol "HBNC." The following table sets forth, for the periods indicated, the high and low prices per share. Also summarized below are the cash dividends declared by quarter for 2001 and 2000. All amounts in the table have been adjusted for the three-for-one stock split declared October 16, 2001. 2001 ------------------------------------ COMMON STOCK BID PRICES DIVIDENDS ----------------------- DECLARED HIGH LOW PER SHARE ----------------------------------- First Quarter $12.67 $ 9.21 $ .15 Second Quarter 14.17 12.33 .15 Third Quarter 14.33 13.50 .15 Fourth Quarter 23.50 14.17 .15 2000 ------------------------------------ COMMON STOCK BID PRICES DIVIDENDS ----------------------- DECLARED HIGH LOW PER SHARE ------------------------------------ First Quarter $14.00 $10.33 $ .15 Second Quarter 10.67 9.50 .15 Third Quarter 10.67 9.58 .15 Fourth Quarter 10.42 9.17 .15 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, 2001, is 628. Form 10-K Horizon will provide without charge to each stockholder upon written request to Mary McColl, Shareholder Relations, 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 be filed with the Securities and Exchange Commission for Horizon's most recent fiscal year. HORIZON'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS HORIZON BANCORP & SUBSIDIARIES 47 BOARD OF DIRECTORS DIRECTORS EMERITUS Susan D. Aaron John A. Garrettson Retired Executive Retired Past Chairman of Horizon Bancorp Dale W. Alspaugh Chancellor Emeritus Larry E. Reed Purdue University North Central Retired Past Chairman of Horizon Bancorp George R. Averitt(*) Adjunct Faculty Burton B. Ruby Purdue University North Central Chairman of Jaymar Ruby, Inc. Former publisher of the Michigan City News Dispatch Executive Officers Robert C. Dabagia Robert C. Dabagia Chairman Chairman Horizon Bancorp Craig M. Dwight President & Chief Executive Officer Craig M. Dwight President & Chief Executive Officer Thomas H. Edwards Horizon Bancorp Executive Vice President Charley E. Gillispie James H. Foglesong Vice President Administration & Chief Financial Officer Valparaiso University Lawrence J. Mazur Robert E. McBride, M.D. Corporate Secretary Pathologist Pathology Consultants, Inc. Investor Information For more copies of this report, Larry N. Middleton current stock quotes and other investor President inquiries, call (219) 874-9272. Century 21 Middleton Company, TRANSFER AGENT Peter L. Pairitz Registrar and Transfer Company Business Developer 10 Commerce Drive Cranford, New Jersey 07016-3572 Bruce E. Rampage 1-800-368-5948 President & Chief Executive Officer St. Anthony Memorial Health Gene L. Rice Retired Farmer Robert E. Swinehart President & Chief Operating Officer Emerson Power Transmission Corp. Spero W. Valavanis Owner / Architect Design Organization, Inc. (*)Director of Horizon Bank only 48 HORIZON BANCORP (Holding Company) Robert C. Dabagia Chairman Craig M. Dwight President & Chief Executive Officer Thomas H. Edwards Executive Vice President James H. Foglesong Chief Financial Officer Lawrence J. Mazur Secretary SUBSIDIARIES HORIZON BANK, N.A. (Holding Company Subsidiary) Craig M. Dwight President & Chief Executive Officer Thomas H. Edwards Executive Vice President HORIZON INSURANCE SERVICES, INC. (Bank Subsidiary) Robert W. Lindenmeyer President HORIZON TRUST & INVESTMENT MANAGEMENT, N.A. (Bank Subsidiary) Lawrence J. Mazur President HBC INSURANCE GROUP, INC. (Holding Company Subsidiary) Craig M. Dwight President & Chief Executive Officer 49 EX-21 9 l92985aex21.txt EXHIBIT 21 EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
Jurisdiction of Name Under Which Subsidiary Incorporation Business is Done - ------------------------------------------------------------------------------------------------------------- Horizon Bank, National Association United States Horizon Bank Horizon Trust & Investment Management, National Association United States Horizon Trust & Investment (a subsidiary of Horizon Bank) Management Horizon Insurance Services, Inc. Indiana Horizon Insurance Services (a subsidiary of Horizon Bank) HBC Insurance Group, Inc. Arizona HBC Insurance Company
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