10-Q 1 l06884ae10vq.txt HORIZON BANCORP 10-Q/QTR END 3-31-04 HORIZON BANCORP FORM 10-Q SECURITIES AND EXCHANGE COMMISSION 450 5th Street N.W. Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2004 Commission file number 0-10792 HORIZON BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1562417 ------- ---------- (State or other jurisdiction of incorporation or organization) (I.R. S. Employer Identification No.) 515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 879-0211 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 2,966,014 at May 7, 2004 PART 1 -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollar Amounts in Thousands) (All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split Declared October 21, 2003)
MARCH 31, 2004 DECEMBER 31, (UNAUDITED) 2003 ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 15,105 $ 28,434 Interest-bearing demand deposits 1 30 Federal funds sold 17,000 ------------------------------ Cash and cash equivalents 15,106 45,464 Interest-bearing deposits 2,460 9,135 Investment securities, available for sale 238,412 215,695 Loans held for sale 3,387 8,213 Loans, net of allowance for loan losses of $6,951 and $6,909 514,264 440,809 Premises and equipment 16,529 16,460 Federal Reserve and Federal Home Loan Bank stock 10,977 10,853 Interest receivable 4,170 3,769 Other assets 18,189 7,045 ------------------------------ Total assets $ 823,494 $ 757,443 ============================== LIABILITIES Deposits Noninterest bearing $ 61,922 $ 71,157 Interest bearing 513,242 475,011 ------------------------------ Total deposits 575,164 546,168 Short-term borrowings 48,121 20,241 Federal Home Loan Bank advances 133,264 125,972 Subordinated debentures 12,372 12,372 Interest payable 745 751 Other liabilities 4,717 5,716 ------------------------------ Total liabilities 774,383 711,220 +============================== STOCKHOLDERS' EQUITY Preferred stock, no par value Authorized, 1,000,000 shares No shares issued Common stock, $.2222 stated value Authorized, 22,500,000 shares Issued, 4,693,895 and 4,684,095 shares 1,043 1,041 Additional paid-in capital 21,136 20,994 Retained earnings 38,796 37,638 Accumulated other comprehensive income 3,661 2,075 Less treasury stock, at cost, 1,698,881 shares (15,525) (15,525) ------------------------------ Total stockholders' equity 49,111 46,223 ------------------------------ Total liabilities and stockholders' equity $ 823,494 $ 757,443 +==============================
See notes to condensed consolidated financial statements 2 HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollar Amounts in Thousands, Except Per Share Data) (All Share and Per Share Amounts Have Been Adjusted for a 3 for 2 Stock Split Declared October 21, 2003)
THREE MONTHS ENDED MARCH 31 ------------------------------- 2004 2003 (UNAUDITED) (UNAUDITED) --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable $ 7,422 $ 8,511 Investment securities: Taxable 1,836 1,290 Tax exempt 573 388 ------------------------------- Total interest income 9,831 10,189 ------------------------------- INTEREST EXPENSE Deposits 2,607 2,584 Federal funds purchased and short-term borrowings 74 73 Federal Home Loan Bank advances 1,403 1,483 Subordinated debentures 158 164 ------------------------------- Total interest expense 4,242 4,304 ------------------------------- NET INTEREST INCOME 5,589 5,885 Provision for loan losses 246 375 ------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,343 5,510 ------------------------------- OTHER INCOME Service charges on deposit accounts 756 724 Fiduciary activities 638 556 Commission income from insurance agency 187 57 Income from reinsurance company 14 Gain on sale of loans 548 1,021 Other income 566 417 ------------------------------- Total other income 2,695 2,789 ------------------------------- OTHER EXPENSES Salaries and employee benefits 3,378 3,249 Net occupancy expenses 480 440 Data processing and equipment expenses 498 488 Other expenses 1,699 1,625 ------------------------------- Total other expenses 6,055 5,802 ------------------------------- INCOME BEFORE INCOME TAX 1,983 2,497 Income tax expense 466 773 ------------------------------- Net Income $ 1,517 $ 1,724 =============================== BASIC EARNINGS PER SHARE $ .51 $.58 DILUTED EARNINGS PER SHARE $ .49 $.56
See notes to condensed consolidated financial statements. 3 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (Table Dollar Amounts in Thousands)
ADDITIONAL ACCUMULATED OTHER COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL ------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2003 $1,041 $20,994 $37,638 $2,075 $(15,525) $46,223 Net income $1,517 1,517 1,517 Other comprehensive income, net of tax, unrealized gains on securities 1,586 1,586 1,586 -------- Comprehensive income $3,103 ======== Exercise of stock options 2 96 98 Tax benefit related to stock options 46 46 Cash dividends ($.12 per share) (359) (359) ------------------ -------------------------------------------------- BALANCES, MARCH 31, 2004 $1,043 $21,136 $38,796 $3,661 $(15,525) $49,111 ================== ==================================================
See notes to condensed consolidated financial statements. 4 HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
THREE MONTHS ENDED MARCH 31 ---------------------------------- 2004 2003 (UNAUDITED) (UNAUDITED) ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,517 $ 1,724 Items not requiring (providing) cash Provision for loan losses 246 375 Depreciation and amortization 372 363 Federal Home Loan Bank stock dividend (124) Mortgage servicing rights recovery (93) Deferred income tax 420 445 Investment securities amortization, net 113 129 Gain on sale of loans (548) (1,021) Proceeds from sales of loans 29,649 76,806 Loans originated for sale (24,275) (67,006) Gain on sale of other real estate owned (2) Deferred loan fees 8 (3) Unearned income (54) (102) (Gain) loss on sale of fixed assets (3) 5 Increase in cash surrender value of life insurance (122) Net change in Interest receivable (401) 69 Interest payable (6) (122) Other assets (226) 487 Other liabilities (999) (379) ---------------------------------- Net cash provided by operating activities 5,472 18,054 ---------------------------------- INVESTING ACTIVITIES Net change in interest-bearing deposits 6,675 (165) Purchases of securities available for sale (58,838) (45,653) Proceeds from maturities, calls, and principal repayments of securities available for sale 38,449 9,356 Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (331) Net change in loans (73,743) 37,618 Proceeds from sale of fixed assets 42 Recoveries on loans previously charged-off 88 77 Proceeds from sale of other real estate owned 17 Purchases of premises and equipment (473) Purchase of bank owned life insurance (12,000) ---------------------------------- Net cash used in investing activities (99,783) (902) ---------------------------------- FINANCING ACTIVITIES Net change in Deposits 28,996 (10,654) Short-term borrowings 27,880 (1,136) Federal Home Loan Bank advance 35,000 15,200 Repayment of Federal Home Loan Bank advance (27,708) (26,600) Proceeds from issuance of stock 144 Dividends paid (359) (317) ---------------------------------- Net cash provided by (used in) financing activities 63,953 (23,507) ---------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENT (30,358) (10,835) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692 ---------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,106 $ 24,857 ================================== ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 4,235 $ 4,412 Income tax paid -- 535
See notes to condensed consolidated financial statements. 5 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1 -- ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A. (Bank), and HBC Insurance Group, Inc. (Insurance Company). All intercompany balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2004 and March 31, 2003 are not necessarily indicative of the operating results for the full year of 2004 or 2003. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon's management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon's Form 10-K annual report for 2003 filed with the Securities and Exchange Commission. The consolidated balance sheet of Horizon as of December 31, 2003 has been derived from the audited balance sheet of Horizon as of that date. In previous financial statements and reports, Horizon had consolidated a trust through which it had issued trust preferred securities ("TPS") and reported the TPS as "guaranteed preferred beneficial interests in Horizon Bancorp's subordinated debentures" in the consolidated balance sheets. The Financial Accounting Standards Board ("FASB") had previously issued FASB Interpretation No. 46 ("FIN 46") and, in December 2003, issued a revision to FIN 46 to clarify certain provisions which affected the accounting for TPS. As a result of the provisions in FIN 46, the trust should be deconsolidated, with Horizon accounting for its investment in the trust as an asset, its subordinated debentures as debt, and the interest paid thereon as interest expense. Horizon had always classified the TPS as debt and the dividends as interest but eliminated its common stock investment and dividends received from the trust. FIN 46 permits and encourages restatement of prior period results, and accordingly, all financial information contained in this release has been adjusted to give effect to the revised provisions of FIN 46. While these changes had no effect on previously reported net interest margin, net income or earnings per share, they increased total interest income and interest expense, as well as total assets and total liabilities. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In August 2002, substantially all of the participants in Horizon's Stock Option and Stock Appreciation Rights Plans voluntarily entered into an agreement with Horizon to cap the value of their stock appreciation rights (SARS) at $14.67 per share and cease any future vesting of the SARS. These agreements with option holders make it more advantageous to exercise an option rather than a SAR whenever Horizon's stock price exceeds $14.67 per share, therefore the option becomes potentially dilutive at $14.67 per share or higher. The number of shares used in the computation of basic earnings per share is 2,990,989 and 2,974,050 for the three-month period ended March 31, 2004 and 2003. The number of shares used in the computation of diluted earnings per share is 3,115,635 and 3,068,941 for the three month period ended March 31, 2004 and 2003. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. 6 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Horizon accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31 2004 2003 ---------------------------------------------------------------------------------------------------------------------------- Net income, as reported $ 1,517 $ 1,724 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (56) (49) ----------------------------------------- Pro forma net income $ 1,461 $ 1,675 ========================================= Earnings per share: Basic - as reported $ .51 $ .58 Basic - pro forma .49 .56 Diluted - as reported .49 .56 Diluted - pro forma .47 .55 ------------------------------------------
NOTE 2-- INVESTMENT SECURITIES
2004 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR MARCH 31 COST GAINS LOSSES VALUE ---------------------------------------------------------------------------------------------------------------------------- Available for sale U. S. Treasury and federal agencies $ 72,298 $ 425 $ (34) $ 72,689 State and municipal 55,873 3,505 (16) 59,362 Federal agency collateralized mortgage obligations 13,807 177 13,984 Federal agency mortgage backed pools 90,201 1,604 (94) 91,711 Corporate Notes 600 66 666 ----------------------------------------------------------------------- Total investment securities $ 232,779 $ 5,777 $ (144) $ 238,412 =======================================================================
7 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands)
2003 ------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE ---------------------------------------------------------------------------------------------------------------------------- Available for sale U. S. Treasury and federal agencies $ 66,945 $ 196 $ (369) $ 66,772 State and Municipal 57,799 2,482 (51) 60,230 Federal agency collateralized mortgage obligations 14,354 176 (42) 14,488 Federal agency mortgage backed pools 72,806 747 (7) 73,546 Corporate notes 600 59 659 ---------------------------------------------------------------------- Total investment securities $ 212,504 $ 3,660 $ (469) $ 215,695 ======================================================================
The amortized cost and fair value of securities available for sale at March 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE ------------------------------------ AMORTIZED FAIR COST VALUE ---------------------------------------------------------------------------------------------------------------------------- Within one year $ 997 $ 998 One to five years 68,922 67,814 Five to ten years 13,567 13,922 After ten years 45,285 49,983 ------------------------------------ 128,771 132,717 Federal agency collateralized mortgage obligations 13,807 13,984 Federal agency mortgage backed pools 90,201 91,711 ------------------------------------ $ 232,779 $ 238,412 ====================================
There were no sales of securities available for sale during the three months ending MARCH 31, 2004 DECEMBER 31, 2003 March 31, 2004 or 2003. NOTE 3 -- LOANS
MARCH 31, DECEMBER 31, 2004 2003 ---------------------------------------------------------------------------------------------------------------------------- Commercial loans $ 162,286 $ 152,362 Mortgage warehouse loans 173,084 126,056 Real estate loans 75,506 67,428 Installment loans 110,339 101,872 ----------------------------------- Allowance for loan losses 521,215 447,718 (6,951) (6,909) ----------------------------------- Total loans $ 514,264 $ 440,809 ==================================
8 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 4-- ALLOWANCE FOR LOAN LOSSES
MARCH 31, DECEMBER 31, 2004 2003 ---------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses Balances, beginning of period $ 6,909 $ 6,255 Provision for losses, operations 246 1,350 Recoveries on loans 88 288 Loans charged off (292) (984) ----------------------------------- Balances, end of period $ 6,951 $ 6,909 ===================================
NOTE 5 -- NONPERFORMING ASSETS
MARCH 31, DECEMBER 31, 2004 2003 ---------------------------------------------------------------------------------------------------------------------------- Nonperforming loans $ 1,533 $ 1,707 Other real estate owned 332 ----------------------------------- Total nonperforming assets $ 1,865 $ 1,707 ===================================
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HORIZON BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp ("Horizon" or "Company") and Horizon Bank, N.A. (Bank) and Horizon's other subsidiaries. Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Horizon, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Horizon's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on Horizon's future activities and operating results include, but are not limited to, changes in: interest rates, general economic conditions, legislative and regulatory changes, U.S. monetary and fiscal policies, demand for products and services, deposit flows, competition and accounting policies, principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. INTRODUCTION The purpose of this discussion is to focus on Horizon's financial condition, changes in financial condition and the results of operations in order to provide a better understanding of the consolidated financial statements included elsewhere herein. This discussion should be read in conjunction with the consolidated financial statements and the related notes. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. OVERVIEW For much of the first quarter, mortgage refinance activity was well below the pace set throughout the first quarter of 2003. This caused a decrease in average mortgage warehouse loans outstanding and a related decline in interest and fee income generated by that category of lending. Growth in all other lending categories was strong. The investment portfolio was increased by approximately $20 million and $12 million of Bank Owned Life Insurance was purchased to maintain earning asset levels. Mortgage loan origination declined causing a decline in the gain on sale of loans sold into the secondary market. Increases in other non-interest income partially offset this decline. Non-interest expense increased a modest 4% primarily related to new market expansion. The effective tax rate declined due to additional tax exempt income. CRITICAL ACCOUNTING POLICIES The notes to the consolidated financial statements included in Item 8 on Form 10-K contain a summary of the Company's significant accounting policies and are presented on pages 38-42 of Form 10-K for 2003. Certain of these policies are important to the portrayal of the Company's financial condition, since 10 they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy. An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management's ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. Horizon's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance may include factors such as local, regional, and national economic conditions and forecasts, and adequacy of loan policies and internal controls, the experience of the lending staff, bank regulatory examination results, and changes in the composition of the portfolio. Horizon considers the allowance for loan losses of $6.951 million adequate to cover losses inherent in the loan portfolio as of March 31, 2004. However, no assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management's ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. FINANCIAL CONDITION Liquidity --------- The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the Federal Home Loan Bank (FHLB). During the three months ended March 31, 2004, cash and cash equivalents decreased by approximately $30.4 million. These funds were used to increase loans outstanding and to increase investment securities. At March 31, 2004, in addition to liquidity provided from the normal operating, funding, and investing activities of Horizon, the Bank has available approximately $123 million in unused credit lines with various money center banks including the FHLB. There have been no other material changes in the liquidity of Horizon from December 31, 2003 to March 31, 2004. Capital Resources ----------------- The capital resources of Horizon and the Bank exceed regulatory capital ratios for "well capitalized" banks at March 31, 2004. Stockholders' equity totaled $49.111 million as of March 31, 2004 compared to $46.223 million as of December 31, 2003. The change in stockholders' equity during the three 11 months ended March 31, 2004 is the result of net income, net of dividends declared, an increase in the market value of investment securities available for sale and the issuance of new shares related to the exercise of stock options. At March 31, 2004, the ratio of stockholders' equity to assets was 5.97% compared to 6.11% at December 31, 2003. During the course of a periodic examination by the Bank's regulators that commenced in February 2003, the examination personnel raised the issue of whether the Bank's mortgage warehouse loans should be treated as other loans rather than home mortgages for call report purposes. If these loans are treated as other loans for regulatory reporting purposes, it would change the calculations for risk-based capital and reduce the Bank's risk-based capital ratios. Management believes that it has properly characterized the loans in its mortgage warehouse loan portfolio for risk-based capital purposes, but there is no assurance that the regulators will concur with that determination. Should the call report classification of the loans be changed, Horizon and the Bank would still be categorized as well capitalized at March 31, 2004. There have been no other material changes in Horizon's capital resources from December 31, 2003 to March 31, 2004. Material Changes in Financial Condition - March 31, 2004 compared to December 31, 2003 -------------------------------------------------------------------- During the first three months of 2004, cash and cash equivalents decreased approximately $30.4 million, investment securities increased approximately $23 million and loans outstanding increased approximately $73 million. The decrease in cash and cash equivalents is related to decreases in deposited items in the process of collection and overnight investments. The increased investments were primarily short term, including callable Federal agency securities with contractual maturities of less than five years and Federal agency mortgage backed pools with estimated average lives of less than five years. All lending categories experienced growth during the quarter. Mortgage warehouse loans grew late in the quarter as mortgage refinance activity picked up in March. Real estate loans increased due to adjustable rate mortgages held in the Bank's portfolio instead of being sold into the secondary market. Commercial loans increased primarily in loans secured by commercial real estate and commercial term loans with new customer relationships. Installment loan growth primarily related to home equity second mortgage loans and indirect automobile loans. Other assets increased due to the acquisition of Bank Owned Life Insurance. Deposits increased approximately $29 million during the quarter. Non-interest bearing deposits decreased primarily from corporate and public fund deposits which moved to interest bearing categories. The growth in interest bearing deposits, occurred primarily in NOW and Money Market Accounts offsetting a decline in negotiable certificates of deposit. Short term borrowings increased approximately $28 million to fund the growth primarily in mortgage warehouse loans which are also short term in nature. FHLB advances increased approximately $7 million to fund asset growth. This additional debt is also short term in nature. Horizon continues to monitor funding sources to reduce the cost of funds and maintain adequate liquidity. There have been no other material changes in the financial condition of Horizon from December 31, 2003 to March 31, 2004. RESULTS OF OPERATIONS Material Changes in Results of Operations - Three months ended March 31, 2004 compared to the three months ended March 31, 2003 ----------------------------------------------------------------------------- All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. 12 During the three months ended March 31, 2004, net income totaled $1.517 million or $.49 per diluted share compared to $1.724 million or $.56 per diluted share for the same period in 2003. Net interest income was $5.589 million for the three months ended March 31, 2004, compared to $5.885 million for the same period of 2003. The decrease was the result of a decrease in net interest margin from 3.59% for the first quarter of 2003 to 3.22% for the first quarter of 2004. This decline was the result of a shift of earning assets from mortgage warehouse loans to the investment portfolio. The investment portfolio averaged $235 million during the first quarter of 2004 compared to $125 million during the same quarter of the prior year. This growth was made possible by a decline in mortgage warehouse loans, which averaged $117 million during the first quarter of 2004 compared to $237 million for the same quarter of the prior year. The decline in mortgage warehouse loans was caused by the slow down in mortgage refinance activity. Mortgage warehouse loans carried a higher yield than the investments, which caused the compression in the net interest margin. Also effecting net interest income was the investment of $12 million in Bank Owned Life Insurance early in the first quarter of 2004. The income from this investment is treated as noninterest income. Total noninterest income was $2.695 million for the three months ended March 31, 2004 compared to $2.789 million for the same period in 2003. Gain on sale of loans declined due to a reduction in mortgage origination volume as the total loans sold during the first quarter declined from $51.4 million in 2003 to $23.1 million in 2004, a 55% decline. Partially offsetting the decline in gain on sale of loans is increased income from the Bank Owned Life Insurance and commission income from Horizon Insurance Services. Noninterest expense increased $253 thousand for the three months ended March 31, 2004 compared to the same period in 2003. The majority of the increase relates to staffing and facility expense for new offices opened since the first quarter of 2003. There have been no other material changes in the results of operations of Horizon for the three months ending March 31, 2004 and 2003. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Horizon currently does not engage in any derivative or hedging activity. Refer to Horizon's 2003 Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2003 Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Evaluation Of Disclosure Controls And Procedures ------------------------------------------------ Based on an evaluation of disclosure controls and procedures as of March 31, 2004, Horizon's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon's disclosure controls (as defined in Exchange Act Rule 13a-15(e)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon's disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness. Changes In Internal Controls ---------------------------- Since the evaluation date, there have been no significant changes in Horizon's internal controls or in other factors that could significantly affect such controls. 14 HORIZON BANCORP AND SUBSIDIARIES PART II - OTHER INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Horizon has posted its Code of Conduct for Executive Officers and Directors and its Advisor Code of Conduct and Ethics on its web site at www.accesshorizon.com ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ------------- Exhibit 11 Statement Regarding Computation of Per Share Earnings Exhibit 31.1 Certification of Craig M. Dwight Exhibit 31.2 Certification of James H. Foglesong Exhibit 32 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) A Form 8-K was filed on January 23, 2004 to furnish the earnings release issued by the Registrant on January 23, 2004 as required by Item 12 of Form 8-K. No other reports on Form 8-K were filed during the three months ended March 31, 2004. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORIZON BANCORP May 10, 2004 /s/ Craig M. Dwight --------------------- ------------------------------------------- Date: BY: Craig M. Dwight President and Chief Executive Officer May 10, 2004 /s/ James H. Foglesong --------------------- ------------------------------------------- Date: BY: James H. Foglesong Chief Financial Officer 16 INDEX TO EXHIBITS The following documents are included as Exhibits to this Report. Exhibit ------- 11 Statement Regarding Computation of Per Share Earnings 31.1 Certification of Craig M. Dwight 31.2 Certification of James H. Foglesong 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 17