10-Q 1 l08628ae10vq.txt HORIZON BANCORP 10-Q/QTR END 6-30-04 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 JUNE 30, 2004 Commission file number 0-10792 HORIZON BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1562417 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 FRANKLIN SQUARE, MICHIGAN CITY, INDIANA 46360 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 879-0211 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,001,122 at August 5, 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)
JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ----------- ---- ASSETS Cash and due from banks $ 20,842 $ 28,434 Interest-bearing demand deposits 1 30 Federal funds sold 17,000 --------- --------- Cash and cash equivalents 20,843 45,464 Interest-bearing deposits 2,000 9,135 Investment securities, available for sale 219,501 215,695 Loans held for sale 1,910 8,213 Loans, net of allowance for loan losses of $6,976 and $6,909 510,487 440,809 Premises and equipment 16,732 16,460 Federal Reserve and Federal Home Loan Bank stock 11,089 10,853 Interest receivable 3,696 3,769 Other assets 20,021 7,045 --------- --------- Total assets $ 806,279 $ 757,443 ========= ========= LIABILITIES Deposits Noninterest bearing $ 68,677 $ 71,157 Interest bearing 524,262 475,011 --------- --------- Total deposits 592,939 546,168 Short-term borrowings 36,908 20,241 Federal Home Loan Bank advances 113,204 125,972 Subordinated debentures 12,372 12,372 Interest payable 750 751 Other liabilities 4,814 5,716 --------- --------- Total liabilities 760,987 711,220 --------- --------- 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, 4,726,158 and 4,684,095 shares 1,050 1,041 Additional paid-in capital 21,582 20,994 Retained earnings 40,243 37,638 Accumulated other comprehensive income (loss) (1,210) 2,075 Less treasury stock, at cost, 1,732,486 and 1,698,881 shares (16,373) (15,525) --------- --------- Total stockholders' equity 45,292 46,223 --------- --------- Total liabilities and stockholders' equity $ 806,279 $ 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 JUNE 30 SIX MONTHS ENDED JUNE 30 -------------------------- ------------------------ 2004 2003 2004 2003 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- ----------- INTEREST INCOME Loans receivable $ 8,505 $ 8,739 $15,927 $17,250 Investment securities Taxable 1,709 1,009 3,545 2,289 Tax exempt 560 512 1,133 900 ------- ------- ------- ------- Total interest income 10,774 10,260 20,605 20,439 ------- ------- ------- ------- INTEREST EXPENSE Deposits 2,602 2,412 5,209 4,996 Federal funds purchased and short-term borrowings 106 107 180 180 Federal Home Loan Bank advances 1,416 1,603 2,819 3,086 Subordinated debentures 139 153 297 307 ------- ------- ------- ------- Total interest expense 4,263 4,275 8,505 8,569 ------- ------- ------- ------- NET INTEREST INCOME 6,511 5,985 12,100 11,870 Provision for loan losses 228 375 474 750 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,283 5,610 11,626 11,120 ------- ------- ------- ------- OTHER INCOME Service charges on deposit accounts 745 804 1,501 1,430 Fiduciary activities 697 631 1,335 1,187 Commission income from insurance agency 86 78 273 135 Income from reinsurance company 14 15 14 29 Gain on sale of loans 395 1,190 943 2,211 Loss on sale of securities (6) (6) Other income 533 346 1,099 861 ------- ------- ------- ------- Total other income 2,470 3,058 5,165 5,847 ------- ------- ------- ------- OTHER EXPENSES Salaries and employee benefits 3,557 3,455 6,935 6,704 Net occupancy expenses 441 431 921 871 Data processing and equipment expenses 491 535 989 1,023 Other expenses 1,814 1,734 3,513 3,359 ------- ------- ------- ------- Total other expenses 6,303 6,155 12,358 11,957 ------- ------- ------- ------- INCOME BEFORE INCOME TAX 2,450 2,513 4,433 5,010 Income tax expense 647 738 1,113 1,511 ------- ------- ------- ------- Net Income $ 1,803 $ 1,775 $ 3,320 $ 3,499 ======= ======= ======= ======= BASIC EARNINGS PER SHARE $ .60 $ .59 $ 1.11 $ 1.17 DILUTED EARNINGS PER SHARE $ .58 $ .57 $ 1.06 $ 1.13
See notes to condensed consolidated financial statements. 3 HORIZON BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (Table Dollar Amounts in Thousands)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL INCOME EARNINGS INCOME (LOSS) STOCK TOTAL ----- ------- ------ -------- ------------- ----- ----- BALANCES, DECEMBER 31, 2003 $1,041 $20,994 $37,638 $ 2,075 $(15,525) $46,223 Net income $ 3,320 3,320 3,320 Other comprehensive income, net of tax, unrealized losses on securities (3,285) (3,285) (3,285) ------- Comprehensive income $ 35 ======= Exercise of stock options 9 363 372 Tax benefit related to stock options 225 225 Purchase treasury stock (848) (848) Cash dividends ($.24 per share) (715) (715) ------ ------- ------- ------- -------- ------- BALANCES, JUNE 30, 2004 $1,050 $21,582 $40,243 $(1,210) $(16,373) $45,292 ====== ======= ======= ======= ======== =======
See notes to condensed consolidated financial statements. 4 HORIZON BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
SIX MONTHS ENDED JUNE 30 ------------------------ 2004 2003 (UNAUDITED) (UNAUDITED) ----------- ----------- OPERATING ACTIVITIES Net income $ 3,320 $ 3,499 Items not requiring (providing) cash Provision for loan losses 474 750 Depreciation and amortization 728 743 Federal Home Loan Bank stock dividend (236) (104) Mortgage servicing rights (recovery) impairment (53) 148 Deferred income tax 726 (655) Investment securities amortization, net 260 639 Gain on sale of loans (943) (2,211) Proceeds from sales of loans 55,265 146,592 Loans originated for sale (48,019) (136,688) Gain on sale of other real estate owned (2) Deferred loan fees 18 (17) Unearned income (120) (193) Loss on sale of securities 6 Loss on sale of fixed assets 3 4 Increase in cash surrender value of life insurance (122) Net change in Interest receivable 73 62 Interest payable (1) (160) Other assets 226 694 Other liabilities (902) 237 -------- --------- Net cash provided by operating activities 10,695 13,346 -------- --------- INVESTING ACTIVITIES Net change in interest-bearing deposits 7,135 (215) Purchases of securities available for sale (69,638) (94,868) Proceeds from maturities, calls, and principal repayments of securities available for sale 60,519 33,575 Proceeds from sale of securities 16,313 Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (1,326) Net change in loans (70,218) (23,811) Proceeds from sale of fixed assets 42 Recoveries on loans previously charged-off 168 147 Proceeds from sale of other real estate owned 17 Purchases of premises and equipment (1,045) (637) Purchase of bank owned life insurance (12,000) -------- --------- Net cash used in investing activities (85,020) (70,822) -------- --------- FINANCING ACTIVITIES Net change in Deposits 46,771 183 Short-term borrowings 16,667 23,843 Federal Home Loan Bank advance 48,300 102,998 Repayment of Federal Home Loan Bank advance (61,068) (71,632) Proceeds from issuance of stock 597 Purchase of treasury stock (848) 119 Dividends paid (715) (634) -------- --------- Net cash provided by financing activities 49,704 54,877 -------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (24,621) (2,599) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,464 35,692 -------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,843 $ 33,093 ======== ========= ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 8,506 $ 8,720 Income tax paid 150 1,600
See notes to condensed consolidated financial statements. 5 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1 -- ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A. (Bank), and HBC Insurance Group, Inc. (Insurance Company). All intercompany balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2004 and June 30, 2003 are not necessarily indicative of the operating results for the full year of 2004 or 2003. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon's management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon's Form 10-K annual report for 2003 filed with the Securities and Exchange Commission. The consolidated balance sheet of Horizon as of December 31, 2003 has been derived from the audited balance sheet of Horizon as of that date. 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 report 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 2,987,483 and 2,974,607 for the six-month period ended June 30, 2004 and 2003. The number of shares used in the computation of diluted earnings per share is 3,119,636 and 3,089,352 for the six month period ended June 30, 2004 and 2003. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. 6 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 1 - ACCOUNTING POLICIES (CONTINUED) Horizon accounts for 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 JUNE 30 2004 2003 -------------------------- ---- ---- Net income, as reported $ 1,803 $ 1,775 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (34) (14) ------- ------- Pro forma net income $ 1,769 $ 1,761 ======= ======= Earnings per share Basic - as reported $ .60 $.59 Basic - pro forma .59 .59 Diluted - as reported .58 .57 Diluted - pro forma .57 .57
SIX MONTHS ENDED JUNE 30 2004 2003 ------------------------ ---- ---- Net income, as reported $ 3,320 $ 3,499 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (90) (65) ------- ------- Pro forma net income $ 3,230 $ 3,434 ======= ======= Earnings per share Basic - as reported $ 1.11 $1.17 Basic - pro forma 1.08 1.15 Diluted - as reported 1.06 1.13 Diluted - pro forma 1.04 1.11
NOTE 2 -- INVESTMENT SECURITIES
2004 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR JUNE 30 COST GAINS LOSSES VALUE ------- ---- ----- ------ ----- Available for sale U. S. Treasury and federal agencies $ 62,252 $ 7 $ (1,376) $ 60,883 State and municipal 54,993 1,222 (713) 55,502 Federal agency collateralized mortgage obligations 13,050 28 (76) 13,002 Federal agency mortgage backed pools 87,568 410 (1,391) 86,587 Corporate Notes 3,500 27 3,527 --------- ---------- ---------- -------- Total investment securities $ 221,363 $ 1,694 $ (3,556) $219,501 ========= ========== ========== ========
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 June 30, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE ---------------------- AMORTIZED FAIR COST VALUE ---- ----- Within one year $ 8,105 $ 8,105 One to five years 54,075 53,118 Five to ten years 14,273 14,132 After ten years 44,292 44,557 --------- --------- 120,745 119,912 Federal agency collateralized mortgage obligations 13,050 13,002 Federal agency mortgage backed pools 87,568 86,587 --------- --------- $ 221,363 $ 219,501 ========= =========
Realized net gains and (losses) on the sale of securities available for sale are summarized as follows:
FOR THE PERIOD ENDED JUNE 30, 2003 ----------------------------- ---- Realized gains $ 93 Realized losses (99) ------ Net realized losses $ (6) ======
There were no sales of securities available for sale during the six months ending June 30, 2004. 8 HORIZON BANCORP AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) NOTE 3 -- LOANS
JUNE 30, DECEMBER 2004 31, 2003 ---- -------- Commercial loans $ 175,237 $ 152,362 Mortgage warehouse loans 131,795 126,056 Real estate loans 90,505 67,428 Installment loans 119,926 101,872 --------- --------- 517,463 447,718 Allowance for loan losses (6,976) (6,909) --------- --------- Total loans $ 510,487 $ 440,809 ========= =========
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
JUNE 30, DECEMBER 2004 31, 2003 ---- -------- Allowance for loan losses Balances, beginning of period $ 6,909 $ 6,255 Provision for losses, operations 474 1,350 Recoveries on loans 168 288 Loans charged off (575) (984) --------- --------- Balances, end of period $ 6,976 $ 6,909 ========= =========
NOTE 5 -- NONPERFORMING ASSETS
JUNE 30, DECEMBER 2004 31, 2003 ---- -------- Nonperforming loans $ 1,599 $ 1,707 Other real estate owned 339 --------- --------- Total nonperforming assets $ 1,938 $ 1,707 ========= =========
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HORIZON BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 FORWARD - LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp ("Horizon" or "Company") and Horizon Bank, N.A. (Bank) and Horizon's other subsidiaries. Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Horizon, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Horizon's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on Horizon's future activities and operating results include, but are not limited to, changes in: interest rates, general economic conditions, legislative and regulatory changes, U.S. monetary and fiscal policies, demand for products and services, deposit flows, competition and accounting policies, principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. INTRODUCTION The purpose of this discussion is to focus on Horizon's financial condition, changes in financial condition and the results of operations in order to provide a better understanding of the consolidated financial statements included elsewhere herein. This discussion should be read in conjunction with the consolidated financial statements and the related notes. All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. OVERVIEW For the first six months of the current year, average earning assets increased in all categories except mortgage warehouse loans. In addition, $12 million of Bank Owned Life Insurance was purchased which is shown on the balance sheet as part of other assets. Average mortgage warehouse loans, while stronger than anticipated in the second quarter of 2004, declined from 2003 levels due to an overall decline in mortgage refinance activity. The growth in earning assets caused an increase in net interest income despite a decline in net interest margin. The decline in mortgage loan refinance activity caused a reduction in the gain on sale of loans, sold into the secondary market. Noninterest expense increased a modest 2.4% 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 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 $6.976 million adequate to cover losses inherent in the loan portfolio as of June 30, 2004. However, no assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management's ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. FINANCIAL CONDITION Liquidity The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the Federal Home Loan Bank (FHLB). During the six months ended June 30, 2004, cash and cash equivalents decreased by approximately $24.6 million. These funds were used to increase loans outstanding and to increase investment securities. At June 30, 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 June 30, 2004. 11 Capital Resources The capital resources of Horizon and the Bank exceed regulatory capital ratios for "well capitalized" banks at June 30, 2004. Stockholders' equity totaled $45.292 million as of June 30, 2004 compared to $46.223 million as of December 31, 2003. The change in stockholders' equity during the six months ended June 30, 2004 is the result of net income, net of dividends declared, a decrease in the market value of investment securities available for sale, purchase of treasury stock and the issuance of new shares related to the exercise of stock options. At June 30, 2004, the ratio of stockholders' equity to assets was 5.62% 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 June 30, 2004. There have been no other material changes in Horizon's capital resources from December 31, 2003 to June 30, 2004. Material Changes in Financial Condition - June 30, 2004 compared to December 31, 2003 During the first six months of 2004, cash and cash equivalents decreased approximately $24.6 million, and loans outstanding increased approximately $69.7 million. The decrease in cash and cash equivalents is related to decreases in deposited items in the process of collection and overnight investments. All lending categories experienced growth during the quarter. 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 loans and indirect automobile loans. Other assets increased due to the acquisition of Bank Owned Life Insurance. Deposits increased approximately $46.8 million during the first six months of 2004. Noninterest bearing deposits decreased primarily from corporate and public fund deposits which moved to interest bearing categories. The growth in interest bearing deposits, occurred primarily in Money Market Accounts and short-term brokered Certificates of Deposit acquired to fund mortgage warehouse activity which surged for a short time during the second quarter of 2004. Short-term borrowings increased approximately $16.7 million to fund the growth in total loans outstanding. FHLB advances decreased approximately $12.8 million due the maturity of short-term advances. Horizon continues to monitor funding sources to reduce the cost of funds and maintain adequate liquidity. There have been no other material changes in the financial condition of Horizon from December 31, 2003 to June 30, 2004. RESULTS OF OPERATIONS Material Changes in Results of Operations - Six months ended June 30, 2004 compared to the six months ended June 30, 2003 All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. 12 During the six months ended June 30, 2004, net income totaled $3.320 million or $1.06 per diluted share compared to $3.499 million or $1.13 per diluted share for the same period in 2003. Net interest income was $12.100 million for the six months ended June 30, 2004, compared to $11.870 million for the same period of 2003. The increase was the result of an increase in average earning assets from $677 million in 2003 to $742 million for the first six months of 2004. The investment portfolio increased approximately $65 million from the same period of the prior year, primarily in callable agency securities, mortgage backed securities and tax exempt municipal securities. Average loans outstanding decreased to $494 million from $510 million for the first six months of 2003. A decline in average mortgage warehouse loans to $142 million during the first six months of 2004 from $239 million during the first six months of the prior year was partially offset by growth in the other loan categories. The net interest margin declined to 3.33% for the first six months of 2004 compared to 3.60% for the first six months of 2003. The increase in the investment portfolio was at lower yields, which caused a decline in net interest margin but had a positive impact on net interest income. Also effecting net interest income was the investment of $12 million in Bank Owned Life Insurance early in 2004. The income from this investment is treated as noninterest income. Total noninterest income was $5.165 million for the six months ended June 30, 2004 compared to $5.847 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 six months declined from $112.6 million in 2003 to $46.8 million in 2004, a 58% 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 $401 thousand for the six months ended June 30, 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 second half of 2003. There have been no other material changes in the results of operations of Horizon for the six months ending June 30, 2004 and 2003. Material Changes in Results of Operations - Three months ended June 30, 2004 compared to the three months ended June 30, 2003 All share and per share amounts have been adjusted for a three for two stock split declared October 21, 2003. During the three months ended June 30, 2004, net income totaled $1.803 million or $.58 per diluted share compared to $1.775 million or $.57 per diluted share for the same period in 2003. Net interest income was $6.511 million for the three months ended June 30, 2004, compared to $5.985 million for the same period 2003. The increase was the result of an increase in average earning assets to approximately $771 million, an increase of approximately $85 million over the same period of 2003. This is partly offset by a decline in net interest margin of 14 basis points to 3.45% for the three months ended June 30, 2004 compared to the same period of 2003. The increase in the investment portfolio was at lower yields, which caused a decline in net interest margin. The provision for loan losses totaled $228 thousand for the three months ended June 30, 2004 compared to $375 thousand for the same period of the prior year. The allowance for loan losses to total loans is 1.35% at June 30, 2004 compared to 1.54% at December 31, 2003. Total noninterest income was $2.470 million for the three months ended June 30, 2004, compared to $3.058 million for the same period in 2003. This decrease relates primarily to a 13 decrease in gain on the sale of loans into the secondary market. During the three months ended June 30, 2004, the gain on sale of mortgage loans totaled $395 thousand based on the sale of approximately $23.7 million of mortgage loans. This compares to a gain of $1.190 million based on the sale of approximately $61.2 million in the same period of the prior year. Noninterest expense increased $148 thousand or 2.4% for the three months ended June 30, 2004 compared to the same period in 2003. The increase relates to staffing and facility expense for new offices opened during the second half of 2003, which were partially offset by cost containment efforts. There have been no other material changes in the results of operations of Horizon for three months ending June 30, 2004 and 2003. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Horizon currently does not engage in any derivative or hedging activity. Refer to Horizon's 2003 Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2003 Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Based on an evaluation of disclosure controls and procedures as of June 30, 2004, Horizon's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon's disclosure controls (as defined in Exchange Act Rule 13a-15(e)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon's disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness. Changes In Internal Controls Since the evaluation date, there have been no significant changes in Horizon's internal controls or in other factors that could significantly affect such controls. 15 HORIZON BANCORP AND SUBSIDIARIES PART II - OTHER INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES ISSUER PURCHASES OF EQUITY SECURITIES The following table presents information with respect to purchases ohe Company made of its Common Stock during the quarter ended June 30, 2004:
TOTAL NUMBER OF NUMBER OF TOTAL SHARES PURCHASED SHARES THAT MAY NUMBER OF AS PART OF PUBLICLY YET BE PURCHASED SHARES AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLAN OR PURCHASED PAID PER SHARE OR PROGRAMS PROGRAM --------- -------------- ----------- ------- April 1, 2004 through April 30, 2004 -- $ -- -- -- May 1, 2004 through May 31, 2004 30,000 (1) 25.38 -- -- June 1, 2004 through June 30, 2004 3,605 (2) 24.08 -- --
(1) The 30,000 shares redeemed were not part of a publicly announced repurchase plan or program. As previously reported in the Company's Current Report on Form 8-K, dated May 6, 2004, these shares were repurchased from a shareholder in a single negotiated transaction. (2) The 3,605 shares redeemed were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees to Horizon as payment for taxes associated with option exercises. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its Annual Shareholders' Meeting on May 6, 2004. (b) The names of the Directors elected at the Annual Meeting were as follows:
Name Votes For Votes Withheld ---- --------- -------------- Susan D. Aaron 2,265,620 79,873 Charley E. Gillispie 2,281,032 64,461 Larry N. Middleton, Jr. 2,267,689 77,803 Robert E. Swinehart 2,277,552 67,947
16 (c) Ratification of BKD, LLP as independent accountants. Votes for 2,335,802 Votes against 648 Votes abstained 9,043
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 April 26, 2004 to furnish the earnings release issued by the Registrant on April 23, 2004 as required by Item 12 of Form 8-K. A Form 8-K was filed on May 6, 2004, to furnish information regarding the repurchase of Horizon Bancorp stock from Chairman of the Board, Robert C. Dabagia. No other reports on Form 8-K were filed during the three months ended June 30, 2004. 17 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 August 5, 2004 /s/ Craig M. Dwight -------------- --------------------------------------------- Date BY: Craig M. Dwight President and Chief Executive Officer August 5, 2004 /s/ James H. Foglesong -------------- --------------------------------------------- Date BY: James H. Foglesong Chief Financial Officer 18 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. 19