<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
Commission file number 0-10792
----------
HORIZON BANCORP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1562417
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
515 Franklin St., Michigan City, Indiana 46360
---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 219-879-0211
------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
-------------- ----------------------
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value, 696,366 shares outstanding at March 18, 1998
------------------------------------------------------------------------
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K X .
----
The aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant, based on the bid price of such stock on March
18, 1998 was $32,375,000.
<PAGE> 2
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into which
Document portion of document is incorporated
-------- -----------------------------------
Portions of the Registrant's 1997 I, II, VI
annual report to shareholders
Portions of the Registrant's III
proxy statement to be filed for
its May 28,1998 annual meeting
of shareholders
Except as provided in Part I, Part II and Part III, no part of the Registrant's
1997 annual report to shareholders or proxy statement shall be deemed
incorporated herein by this reference or to be filed with the Securities and
Exchange Commission for any purposes.
2
<PAGE> 3
PART I
------
ITEM 1. BUSINESS
(a) General Development of Business
--------------------------------
Horizon Bancorp, a registered bank holding company organized under the
laws of the State of Indiana on April 26, 1983, (Registrant), became the
parent corporation and sole shareholder of The First Merchants National
Bank of Michigan City pursuant to a plan of reorganization effective
October 31, 1983. Prior to October 31, 1983, the Registrant conducted no
business and had only nominal assets necessary to complete the plan of
reorganization.
On October 1, 1986 the Registrant issued 399,340 shares of its common
stock in exchange for all of the common stock of Citizens Michiana
Financial Corporation in connection with mergers of such companies and
their subsidiaries. Subsequent to the merger, the Registrant remains a
one-bank holding company with a wholly-owned subsidiary, Horizon Bank,
N.A. (Bank) and Bank's wholly-owned subsidiary, IMS Investment
Management, N.A. (IMS) and non-bank subsidiaries, HBC Insurance Group
(Insurance Company) and The Loan Store, Inc., (Loan Store).
(b) Financial Information About Industry Segments
---------------------------------------------
The Registrant, Bank and its subsidiaries are engaged in the commercial
and retail banking business, investment management services, retail
lending and insurance credit life sales. Refer to Item 1(e) and Item 6
for information pertaining to Registrant's banking business.
(c) Narrative Description of Business
---------------------------------
The Registrant's business is that incident to its 100% ownership of
Bank, Loan Store and the Insurance Company. The main source of funds for
the Registrant is dividends from Bank. Bank was chartered as a national
bank association in 1873 and has operated continuously since that time.
Bank, whose deposits are insured by the Federal Deposit Insurance
Corporation to the extent provided by law, is a full-service commercial
bank offering a broad range of commercial and retail banking services,
corporate and individual trust and agency services, and other services
incident to banking. Bank maintains five facilities located exclusively
within LaPorte County, Indiana and four facilities located in Porter
County, Indiana. At December 31, 1997, Bank had total assets of
$359,751,000 and total deposits of $264,413,000. Aside from the stock of
Bank, Insurance Company and Loan Store, the Registrant's only other
significant assets are cash and cash equivalents totaling approximately
$864,000, investment securities totaling approximately $401,000 and
taxes receivable of approximately $1,323,000 at December 31, 1997.
The business of the Registrant, Bank, IMS, Insurance Company and Loan
Store is not seasonal to any material degree.
No material part of the Registrant's business is dependent upon a
single or small group of customers, the loss of any one or more of whom
would have a materially adverse effect on the business of the
Registrant. Revenues from loans accounted for 72% in 1997, 68% in 1996,
and 67% in 1995 of the total consolidated revenue. Revenues from
investment securities accounted for 14% in 1997, 15% in 1996 and 20% in
1995 of total consolidated revenue.
The Registrant has no employees and there are approximately 180 full
and part-time persons employed by Bank , IMS and Loan Store as of
December 31, 1997.
A high degree of competition exists in all major areas where the
Registrant engages in business. Bank's primary market consists of
LaPorte County, Indiana, Porter County, Indiana, and Berrien County,
Michigan. Bank competes with commercial banks located in the home
county and contiguous counties in Indiana and Michigan, as well as with
savings and loan associations, consumer finance companies, and credit
unions located therein. To a more moderate extent, Bank competes with
Chicago money center banks, mortgage banking companies, insurance
companies, brokerage houses, other institutions engaged in money market
financial services, and certain government agencies.
3
<PAGE> 4
The Insurance Company offers credit life and accident and health
insurance. The Loan Store, Inc. is engaged in the business of retail
lending and operates four facilities in Northwest Indiana. The net
income generated from the Insurance Company and the Loan Store are not
significant to the overall operations of the Registrant.
Regulation
----------
The earnings and growth of the banking industry and the Registrant are
affected not only by the general economic conditions, but also by the
credit policies of monetary authorities, particularly the Federal
Reserve System. An important function of the Federal Reserve System is
to regulate the national supply of bank credit in order to contest
recessionary trends and curb inflationary pressures. Among the
instruments of monetary policy used by the Federal Reserve System to
implement these objectives are open market operations in U.S. Government
securities, changes in the discount rate on member bank borrowings, and
changes in reserve requirements against member bank deposits. These
means are used in varying combinations to influence overall growth of
bank loans, investments and deposits and may also affect interest rates
charged on loans or paid on deposits. The monetary policies of the
Federal Reserve System have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to
do so in the future. Because of changing conditions in the national and
international economy and the money markets, and as a result of actions
by monetary and fiscal authorities, including the Federal Reserve
System, interest rates, credit availability and deposit levels may
change due to circumstances beyond the control of the Registrant or
Bank.
The Registrant, as a bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (Act), and is
registered with the Board of Governors of the Federal Reserve System
(Board of Governors). Under the Act, the Registrant is required to
obtain prior approval of the Board of Governors before acquiring direct
ownership or control of more than 5% of the voting shares of any bank.
With certain exceptions, the Act precludes the Registrant from acquiring
direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks, or
furnishing services to its subsidiary. The Registrant may engage in, and
may own shares of companies engaged in, certain activities found by the
Board of Governors to be so closely related to banking as to be a proper
incident thereto.
The Registrant is required to file annual reports of its operations
with the Board of Governors and such additional information as they may
require pursuant to the Act, and the Registrant and Bank are subject to
examination by the Board of Governors. Further, the Registrant and Bank
are prohibited from engaging in certain tie-in arrangements with
respect to any extension of credit or provision of property or
services.
The Board of Governors also possesses the authority through cease and
desist powers to regulate parent holding company and nonbank
subsidiaries where action of a parent holding company or its nonbank
subsidiaries constitutes a serious threat to the safety, soundness or
stability of a subsidiary bank. Federal bank regulatory agencies also
have the power to regulate debt obligations issued by bank holding
companies. Included in these powers is the authority to impose interest
ceilings and reserve requirements on such debt obligations.
The acquisition of banking subsidiaries by bank holding companies is
subject to the jurisdiction of, and requires the prior approval of, the
Federal Reserve and, for institutions resident in Indiana, the Indiana
Department of Financial Institutions. Bank holding companies located in
Indiana are permitted to acquire banking subsidiaries throughout the
state, subject to limitations based upon the percentage of total state
deposits of the holding company's subsidiary banks. Further, Indiana law
permits interstate bank holding company acquisitions on a reciprocal
basis, subject to certain limitations. Beginning July 1, 1992, Indiana
law permits the Registrant to acquire banks, and be acquired by bank
holding companies, located in any state in the country which permits
reciprocal entry by Indiana bank holding companies.
The Registrant, Bank, IMS, Insurance Company and Loan Store are
"affiliates" within the meaning of the Federal Reserve Act. The Federal
Reserve Act and the Federal Deposit Insurance Act limit the amount of
the Bank's loans or extensions of credit to affiliates, its investments
in the stock or other securities thereof, and its taking of such stock
or securities as collateral for loans to any borrower.
4
<PAGE> 5
Bank, as a national bank, is regulated and regularly examined by the
Office of the Comptroller of the Currency (OCC). In addition to certain
statutory limitations on the payment of dividends, approval of the OCC
is required for any dividend to the Registrant by Bank if the total of
all dividends, including any proposed dividend, declared by Bank in any
calendar year exceeds the total of its net profits (as defined by the
OCC) for that year combined with its retained net profits for the
preceding two years, less any required transfers to surplus.
The Federal Reserve Board implemented risk-based capital requirements
for banks and bank holding companies in December, 1988. The risk-based
capital requirements have little effect on the Registrant because
existing capital is in excess of the requirements. (See additional
discussion in Management's Discussion and Analysis in Registrant's
Annual Report to Shareholders, Exhibit 13.)
(d) Financial Information about Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales
------------
None
(e) Statistical Disclosures
-----------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
Information required by this section of Securities Act Industry Guide 3
is presented in Management 's Discussion and Analysis Section of the
Corporation's 1997 Annual Report to Shareholders.
II. INVESTMENT PORTFOLIO
(A) The following is a schedule of the book value of investment securities
available for sale and held to maturity at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S. Government agencies and corporations $3,965 $4,965 $7,165
Mortgage-backed securities 39,985 49,683 62,717
Other securities 4,020 4,248 4,281
Unrealized gain/(loss) 668 145 779
--------------------------------------------------------
Total investment securities available for sale $48,638 $59,041 $74,942
========================================================
HELD TO MATURITY
U.S. Treasury and U.S. Government agencies and corporations $4,965 $2,793 $3,164
Obligations of states and political subdivisions 9,407 10,017 9,003
--------------------------------------------------------
Total investment securities held to maturity $14,372 $12,810 $12,167
========================================================
Total investment securities available for sale and held
to maturity $63,010 $71,851 $87,109
========================================================
</TABLE>
5
<PAGE> 6
II. INVESTMENT PORTFOLIO (Continued)
(B) The following is a schedule of maturities of each category of debt
securities and the related weighted average yield of such securities as of
December 31, 1997:
<TABLE>
<CAPTION>
One year or less After one year After five years After ten years
through five years through ten years
(Thousands) Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S. Government $2,080 8.05% $1,695 6.56% $250 6.66%
agency securities(1)
Other securities 4,015 7.50%
Mortgage-backed securities (2) 954 6.84% 11,952 7.08% 27,692 6.98%
-------------------------------------------------------------------------------------
Total $6,095 7.69% $2,649 6.66% $12,202 7.07% $27,692 6.98%
HELD TO MATURITY
U.S. Government agency securities $2,040 7.42%
Obligations of states and political 1,309 3.97% 2,666 4.75% 5,432 5.05%
subdivisions
-------------------------------------------------------------------------------------
Total $3,349 6.07% $2,666 4.75% $5,432 5.05% $0 0.00%
Total investment securities available $9,444 7.11% $5,315 5.70% $17,634 6.45% $27,692 6.98%
for sale and held to maturity
<FN>
(1) Amortized cost is based on contractual maturity or call date where a call
option exists
(2) Maturity based upon maturity date
</TABLE>
The weighted average interest rates are based on coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased
at a premium or discount. Yields are not presented on a tax-equivalent
basis.
(C) Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. Government,
there were no investments in securities of any one issuer which
exceeded 10% of the consolidated stockholders' equity of the Registrant
at December 31, 1997.
III. LOAN PORTFOLIO
(A) Types of Loans - Total loans on the balance sheet are comprised of the
following classifications at December 31 for the years indicated.
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, agricultural and $73,177 $75,460 $66,125 $67,177 $64,645
commercial tax-exempt loans
Real estate mortgage loans 120,345 133,739 119,739 105,512 103,693
Installment loans 64,593 62,277 55,798 50,933 52,880
------------------------------------------------------------------------------
Total loans $258,115 $271,476 $241,662 $223,622 $221,218
==============================================================================
</TABLE>
6
<PAGE> 7
III. LOAN PORTFOLIO (Continued)
(B) Maturities and Sensitivities of Loans to Changes in Interest Rates - The
following is a schedule of maturities and sensitivities of loans to changes
in interest rates, excluding real estate mortgage and installment loans, as
of December 31, 1997:
<TABLE>
<CAPTION>
Maturing or repricing (thousands) One year or One through After five Total
less five years years
----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, agricultural and $33,873 $31,443 $7,861 $73,177
commercial tax-exempt loans
</TABLE>
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.)
<TABLE>
<CAPTION>
(Thousands) Fixed Rate Variable Rate
--------------------------------
<S> <C> <C>
Total commercial, financial, $29,547 $9,757
agricultural, and commercial tax-exempt
loans due after one year
</TABLE>
(C) Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following schedule
summarizes nonaccrual, past due and restructured loans.
<TABLE>
<CAPTION>
December 31 (thousands) 1997 1996 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a nonaccrual $319 $316 $668 $2,794 $1,687
basis
(b) Accruing loans which are contractually 862 682 533 474 481
past due 90 days or more as to interest
and principal payments
(c) Loans not included in (a) or (b)
which are "Troubled Debt Restructuring's"
as defined by SFAS No. 15
----------------------------------------------------------------------------
Totals $1,181 $998 $1,201 $3,268 $2,168
============================================================================
</TABLE>
The decrease in nonaccrual loans in 1995 is primarily due to three
loans which were returned to an accruing basis. These loans had
sustained required payment performance over the last six months or
longer. The increase in nonaccrual loans in 1994 is due primarily to
three loans for approximately $1,500,000, secured by real estate and
having common ownership.
These loans were placed on nonaccrual in April and May of 1994.
7
<PAGE> 8
<TABLE>
III. LOAN PORTFOLIO (Continued)
<S> <C>
(Thousands)
Gross interest income that would have been $32
recorded on nonaccrual loans out standing
as of Decmber 31, 1997 in the period if
the loans had been current, in accordance
with their original terms and had been
outstanding throughout the period or since
origination if held for part of the period.
Interest income actually recorded on 0
nonaccrual loans outstanding as of
December 31, 1997 and included in net
income for the period.
Interest income not recognized during the $32
period on nonaccrual loans outstanding as
of December 31, 1997.
</TABLE>
Discussion of Nonaccrual Policy
From time to time, the Bank obtains information which may lead
management to believe that the collection of interest may be doubtful
on a particular loan. In recognition of such, it is management's policy
to convert the loan from an "earning asset" to a nonaccruing loan.
Further, it is management's policy to place a commercial loan on a
nonaccrual status when delinquent in excess of 90 days, unless the Loan
Committee approves otherwise. All loans placed on nonaccrual status
must be reviewed by the officer responsible for the loan, the senior
lending officer and the loan review officer. The loan review officer
monitors the loan portfolio for any potential problem loans.
2. Potential Problem Loans
Loans where there are serious doubts as to the ability of the borrower
to comply with present loan repayment terms, and not included in
Section 1 above, amount to $44,000 at December 31, 1997. Loan customers
included in this category are having financial difficulties at the
present time and may need adjustments in their repayment terms.
Payments are anticipated or collateral or guarantees are available to
reduce any possible loss. These loans and potential loss exposure have
been considered in management's analysis of the adequacy of the
allowance for loan losses. Consideration was given to loans classified
for regulatory purposes as loss, doubtful, substandard or special
mention that have not been disclosed in Section 1 above. Management
believes that these loans do not represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources, or
management believes that these loans do not represent material credits
about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment terms.
3. Foreign outstandings
None
4. Loan Concentrations
As of December 31, 1997 there are no significant concentrations of
loans exceeding 10% of total loans other than those disclosed in Item
III above.
8
<PAGE> 9
III. LOAN PORTFOLIO (Continued)
(D) Other Interest-Bearing Assets
Other than $125,000 held as other real estate owned, net of allowance,
there are no other interest-bearing assets as of December 31, 1997
which would be required to be disclosed under Item III C.1 or 2 if such
assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following is an analysis of the activity in the allowance for loan
losses account:
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOANS
Loans outstanding at the end of the period (1) 258,115 271,476 241,662 223,622 219,139
Average loans outstanding during the period (1) 269,348 256,580 226,198 218,053 214,033
(1) Net of unearned income and deferred loan fees
<CAPTION>
ALLOWANCE FOR LOAN LOSSES 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of the period $2,435 $2,777 $2,555 $2,310 $1,997
Loans charged-off:
Commercial and agricultural loans (56) (11) (45) (213)
Real estate mortgage loans (1) (14) (17)
Installment loans (1,384) (532) (231) (221) (343)
------- ------ ----- ----- -----
Total loans charged-off (1,441) (557) (293) (221) (556)
Recoveries of loans previously charged-off:
Commercial and agricultural loans 50 27 358 143 339
Real estate mortgage loans 8
Installment loans 333 122 149 158 254
--- --- --- --- ---
Total loan recoveries 383 149 515 301 593
Net loans (charged-off)/recovered (1,058) (408) 222 80 37
Provision charged to operating expense 1,325 66 165 276
-------------------------------------------------------------------------------
Balance at the end of the period $2,702 $2,435 $2,777 $2,555 $2,310
===============================================================================
Ratio of net (charge-offs)/recoveries to average (0.39)% (0.16)% 0.10% 0.04% 0.02%
loans outstanding for the period
</TABLE>
The increase in the provision for loan losses in 1997 was the result of
increased charge-offs identified in the installment loan portfolio,
specifically direct consumer loans and credit cards. Management
believes that by mid-1998, the volume of charge-offs in these
portfolios will begin to reduce and that a more normal provision will
be re-instated. Management expects charge-offs in all other portfolios
to remain at the 1997 levels.
9
<PAGE> 10
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and the percentage of loans in each category
to total loans.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31. (THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL ALLOWANCE % OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, $765 0.3% $576 0.2% $733 0.3% $1,434 0.6% $1,064 0.5%
financial and
agricultural
Real estate 82 0.0% 102 0.0% 139 0.1% 111 0.0% 171 0.1%
mortgage
Installment 1,290 0.5% 1,075 0.4% 655 0.3% 407 0.2% 514 0.2%
Unallocated 565 682 1,250 603 561
------------------------------------------------------------------------------------------------------------------
Total $2,702 1.0% $2,435 0.9% $2,777 1.1% $2,555 0.9% $2,310 1.1%
==================================================================================================================
</TABLE>
The increase in the reserve allocation for installment loans from 1995
to 1996 is primarily the result of the change in methodology for the
historical portion of the allowance calculation. In 1996, the Bank
began using the industry average charge-off rate instead of the Bank's
historical charge-off rate which was used in previous years.
This change in methodolgy resulted in a $325 increase in the portion of
the allowance allocated to installment loans in 1996.
V. DEPOSITS
Information required by this section is incorporated by reference to
the information appearing under the caption "Summary of Selected
Financial Data" of the Registrant's Annual Report to Shareholders,
Exhibit 13.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is incorporated by reference to the
information appearing under the caption "Summary of Selected Financial
Data" of the Registrant's Annual Report to Shareholders, Exhibit 13.
10
<PAGE> 11
VII. SHORT-TERM BORROWINGS
The following is a schedule of statistical information relative to
securities sold under agreements to repurchase which were secured by
U.S. Treasury and U.S. Government agency securities and mature within
one year. This product was discontinued on January 1, 1997. There were
no other categories of short-term borrowings for which the average
balance outstanding during the period was 30 percent or more of
shareholders' equity at the end of the period.
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Outstanding at year end $0 $11,562 $9,558
Approximate weighted average interest 0.00% 5.14% 5.52%
rate at year-end
Highest amount outstanding as of any $0 $14,822 $16,446
month-end during the year
Approximate average outstanding during $0 $10,961 $8,196
the year
Approximate weighted average interest 0.00% 5.07% 5.65%
rate during the year
</TABLE>
ITEM 2. PROPERTIES
- -------------------
The main office of the Registrant and Bank is located at 515 Franklin
Square, Michigan City, Indiana. The building located adjacent to the main
office of the Registrant and Bank, at 502 Franklin Square, houses the
credit administration, operations and micro-computer departments of Bank.
In addition to these principal facilities, the Bank has eight sales
offices located at:
5477 Johnson Road, Michigan City, Indiana
3631 South Franklin Street, Michigan City, Indiana
117 E First St., Wanatah, Indiana
1410 Lincolnway, LaPorte, Indiana
754 Indian Boundary Road, Chesterton, Indiana
3125 N. Calumet, Valparaiso, Indiana
6504 U.S. Highway 6, Portage, Indiana
265 U.S. Highway 30, Valparaiso, Indiana
The Loan Store has sales offices at the following locations:
200 W 80th Place, Suite C, Merriville, Indiana
8343 Indianapolis Blvd. , Highland, Indiana
6313 University Commons, South Bend, Indiana
5176 South Franklin, Michigan City, Indiana
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The information required under this Item is incorporated by reference
to the information appearing under the caption "Note 18 - Commitments,
Off-Balance Sheet Risk and Contingencies" of the registrants Annual
Report to Shareholders, Exhibit 13.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Registrant's stockholders
during the fourth quarter of the 1997 fiscal year.
11
<PAGE> 12
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information required under this item is incorporated by reference to
the information appearing under the caption "Market for Horizon's Common
Stock and Related Stockholder Matters" of the Registrant's Annual Report
to Shareholders, Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required under this item is incorporated by reference to
the information appearing under the caption "Summary of Selected
Financial Data" of the Registrant's Annual Report to Shareholders,
Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Management's discussion and analysis of financial condition and results
of operations appears in the 1997 Annual report to Shareholders,
Exhibit 13 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements and supplementary data required
under this item are incorporated herein by reference to the Annual
Report to Shareholders, Exhibit 13. The Registrant is not required to
furnish the supplementary financial information specified by Item 302
of Regulation S-K.
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31,1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
Report of Independent Public Accountants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The disclosures required under this item are incorporated by reference
to the Registrant's Forms 8-K, Exhibit 16.
PART III
Information relating to the following items will be included in the
Registrant's definitive proxy statement for the annual meeting of
shareholders to be held May 28, 1998 ("1998 Proxy Statement"). The
1998 Proxy Statement will be filed with the Commission within one
hundred twenty days of the close of the Registrant's last fiscal year
and is in part incorporated into this Form 10-K Annual Report by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
12
<PAGE> 13
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements
The following consolidated financial statements of the Registrant
appear in the 1997 annual report to shareholders on the pages
referenced and are specifically incorporated by reference under Item
8 of this Form 10-K:
<TABLE>
<CAPTION>
Annual Report
Page Number
-----------
<S> <C>
Consolidated Balance Sheets 21
Consolidated Statements of Income 22
Consolidated Statements of Changes in Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to the Consolidated Financial Statements 25 - 43
Report of Independent Public Accountants 44
</TABLE>
(a) 2. Financial Statement Schedules
-----------------------------
Financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is
included in the financial statements.
(a) 3. Exhibits
--------
Reference is made to the Exhibit Index which is found on page 16 of
this Form 10-K.
(b) Reports on Form 8-K
-------------------
None
Exhibits
- --------
(c) Reference is made to the Exhibit Index which is found on page 16 of
his Form 10-K.
(d) Financial Statement Schedules
-----------------------------
Financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is
included in the financial statements.
13
<PAGE> 14
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HORIZON BANCORP
----------------------------------------
(Registrant)
Date March 31, 1998 /s/ Larry E. Reed
------------------ -----------------------------------
Larry E. Reed
Chairman & Chief Executive Officer
Date March 31, 1998 /s/ Thomas P. McCormick
------------------ -----------------------------------
Thomas P. McCormick
President
Date March 31, 1998 /s/ Diana E. Taylor
------------------ -----------------------------------
Diana E. Taylor
Chief Financial Officer/Secretary/Treasurer
14
<PAGE> 15
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date Signature and Title
---- -------------------
March 31, 1998 /s/ Dale W. Alspaugh
- ------------------ -----------------------------------
Dale W. Alspaugh, Director
March 31, 1998 /s/ Russell L. Arndt
- ------------------ -----------------------------------
Russell L. Arndt, Director
March 31, 1998 /s/ George R. Averitt
- ------------------ -----------------------------------
George R. Averitt, Director
March 31, 1998 /s/ James D. Brown
- ------------------ -----------------------------------
James D. Brown, Director
March 31, 1998 /s/ Robert C. Dabagia
- ------------------ -----------------------------------
Robert C. Dabagia, Director
March 31, 1998 /s/ Myles J. Kerrigan
- ------------------ -----------------------------------
Myles J. Kerrigan, Director
March 31, 1998 /s/ Donald J. Manaher
- ------------------ -----------------------------------
Donald J. Manaher, Director
March 31, 1998 /s/ Robert E. McBride
- ------------------ -----------------------------------
Robert E. McBride, Director
March 31, 1998 /s/ Thomas P. McCormick
- ------------------ -----------------------------------
Thomas P. McCormick, Director
President
March 31, 1998 /s/ Boyd W. Phelps
- ------------------ -----------------------------------
Boyd W. Phelps, Director
March 31, 1998 /s/ Larry E. Reed
- ------------------ -----------------------------------
Larry E. Reed, Director
Chairman & Chief Executive Officer
March 31, 1998 /s/ Gene L. Rice
- ------------------ -----------------------------------
Gene L. Rice, Director
March 31, 1998 /s/ Susan D. Sterger
- ------------------ -----------------------------------
Susan D. Sterger, Director
March 31, 1998 /s/ Robert E. Swinehart
- ------------------ -----------------------------------
Robert E. Swinehart, Director
15
<PAGE> 16
EXHIBIT INDEX
-------------
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBERS
- ------ ----------- ------------
<S> <C> <C>
3.1 ARTICLES OF INCORPORATION OF HORIZON BANCORP INCORPORATED BY REFERENCE
TO 12/31/89 FORM 10-K
3.2 BY-LAWS OF HORIZON BANCORP INCORPORATED BY REFERENCE
TO 12/31/91 FORM 10-K
10.1 MATERIAL CONTRACTS-AGREEMENT REGARDING INCORPORATED BY REFERENCE
EMPLOYMENT CONTRACTS TO 12/31/87 FORM 10-K
10.2 MATERIAL CONTRACTS-1987 STOCK OPTION AND INCORPORATED BY REFERENCE
STOCK APPRECIATION RIGHTS PLAN OF HORIZON TO 12/31/86 FORM 10-K
BANCORP
10.3 MATERIAL CONTRACTS-NONQUALIFIED STOCK OPTION INCORPORATED BY REFERENCE
AND STOCK APPRECIATION RIGHTS AGREEMENT TO 12/31/86 FORM 10-K
10.4 MATERIAL CONTRACTS-AMENDED NONQUALIFIED INCORPORATED BY REFERENCE
DIRECTORS DEFERRED COMPENSATION PLAN TO 12/31/89 FORM 10-K
10.5 MATERIAL CONTRACTS-SUPPLEMENTAL EMPLOYEE INCORPORATED BY REFERENCE
RETIREMENT PLAN TO THE 12/31/96 FORM 10-K
11 STATEMENT REGARDING COMPUTATION OF PER SHARE INCORPORATED HEREIN IN EXHIBIT 13,
EARNINGS-REFER TO ANNUAL REPORT PAGE 27
FOOTNOTE 1
13 REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS INCORPORATED HEREIN
FOR THE YEAR ENDED DECEMBER 31, 1997
(NOT DEEMED FILED EXCEPT FOR PORTIONS
THEREOF WHICH ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO THIS FORM 10-K)
21 SUBSIDIARIES OF THE REGISTRANT INCORPORATED HEREIN
</TABLE>
16
<PAGE> 1
Exhibit 13 - Annual Report to Shareholders for the year ended December
31, 1997
17
<PAGE> 2
Management Discussion and Analysis of Results of Operations and
Financial Condition
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
- ---------------------
Horizon maintains a high quality investment portfolio with very low credit
risk. Investment securities totaled $60.085 million at December 31, 1997 and
consisted of U.S. Treasury and Government Agency securities of $6.065 million
(10%); Municipal securities of $9.407 million (16%); Equity securities of
$4.015 million (7%); and Mortgage Backed securities of $40.598 million (67%).
Total investment securities decreased 16.4% from 1996. The decrease was from
principal and interest payments received on mortgage backed securities and from
the maturity of investments, primarily U.S. Treasury and Government Agency
securities and Municipal securities. These funds were used primarily to repay
maturing deposits during 1997.
As indicated above, the majority of the investment portfolio consists of
mortgage backed securities. These instruments are secured by residential
mortgages of varying maturities. Principal and interest payments are received
monthly as the underlying mortgages are repaid. These payments also include
prepayments of mortgage balances as borrowers either sell their homes or
refinance their mortgages. Therefore, mortgage backed securities have
maturities that are stated in terms of average life. The average life is the
average amount of time that each principal dollar is expected to be
outstanding. As of December 31, 1997, the mortgage backed securities in the
investment portfolio had an average life of 5.6 years. Mortgage backed
securities that have interest rates above current market rates are purchased at
a premium. These securities may experience a significant increase in
prepayments when lower market interest rates create an incentive for the
borrower to refinance the underlying mortgage. This may result in a decrease of
current income. That risk is mitigated by a shorter average life. Management
currently believes that prepayment risk on these securities is nominal.
1
<PAGE> 3
Mortgage backed securities are repriced when the underlying mortgages carry
adjustable interest rates, some of which may have caps. Approximately 36% of
the mortgage backed securities that Horizon holds are secured by adjustable
rate mortgages. Adjustments to the interest rates on the underlying mortgages
occur throughout the year and these rate adjustments are passed through to the
mortgage backed security immediately. The average amount and yield of the
securities subject to repricing during 1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Amount Yield
------- -----
<S> <C> <C>
First Quarter, 1998 $7,627 7.87%
Second Quarter, 1998 0 0.00%
Third Quarter, 1998 6,800 7.48%
Fourth Quarter, 1998 0 0.00%
</TABLE>
The portion of the investment portfolio that is represented by the securities
of State and Political Subdivisions is generally rated by Standard and Poor's
and/or Moody's Investors Service. At December 31, 1997, this portion of the
investment portfolio have a book value of $9.407 million and of that amount,
$6.248 million (67%) were rated AAA; $1.252 million (13%) were rated AA or A;
and $1.907 million (20%) were not rated. Most of the not rated bonds were
issued by local municipalities in Northwest Indiana.
At December 31, 1997, 80.9% of investment securities were classified as
available for sale compared to 82.2% at December 31, 1996. Securities
classified as available for sale are carried at their fair value, with both
unrealized gains and losses added or subtracted, net of tax, directly to
stockholders' equity. This accounting method adds potential volatility to
stockholders' equity, but net income is not affected unless securities are
sold. Net appreciation on these securities totaled $668 thousand, which
resulted in a $400 thousand addition, net of tax, to stockholders' equity at
December 31, 1997. This compared to a $85 thousand, net of tax, addition to
stockholders' equity at December 31, 1996.
Currently, Horizon does not maintain a trading account and is not using any
derivative products for hedging or other purposes.
2
<PAGE> 4
LOANS
Total loans were $258.115 million at December 31, 1997, the principal earning
asset of Bank . The current level of loans is a decrease of 4.9% from the
December 31, 1996 level of $271.476 million. As the table below indicates, the
decreases are primarily in 1-4 family real estate loans which decreased $13.154
million or 10.04%. This decrease was caused by the sale of mortgage loans
during 1997.
<TABLE>
<CAPTION>
(In thousands) $ %
December 31 1997 1996 Change Change
----------- ---- ---- ------ ------
<S> <C> <C> <C> <C>
Real estate loans:
1-4 Family $117,917 $131,071 (13,154) -10.04%
Multifamily 433 466 (33) -7.08%
Other 1,995 2,202 (207) -9.40%
----- ----- ----- ------
Total 120,345 133,739 (13,394) -10.02%
Commercial Loans:
Working Capital and Equipment 57,188 59,359 (2,171) -3.66%
Real Estate, including 5,002 5,698 (696) -12.21%
Agriculture
Tax Exempt 9,489 6,926 2,563 37.01%
Other 1,498 3,477 (1,979) -56.92%
----- ----- ------- -------
Total 73,177 75,460 (2,283) -3.03%
Consumer Loans:
Auto 19,354 20,353 (999) -4.91%
Recreation 1,697 1,434 263 18.34%
Real Estate/ Home Improvement 21,828 19,929 1,899 9.53%
Home Equity 3,941 4,041 (100) -2.47%
Credit Cards 6,806 7,244 (438) -6.05%
Unsecured 4,620 5,154 (534) -10.36%
Other 6,347 4,122 2,225 53.98%
----- ----- ----- ------
Total 64,593 62,277 2,316 3.72%
Grand Total $258,115 $271,476 (13,361) -4.92%
======== ======== ======== ======
</TABLE>
The acceptance and management of credit risk is an integral part of Bank's
business as a financial intermediary. Bank has established rigorous
underwriting standards including a policy that monitors the lending function
through strict administrative and reporting requirements. Bank engages an
independent third-party loan review function that regularly reviews asset
quality.
3
<PAGE> 5
REAL ESTATE LOANS
Real estate loans totaled $120.345 million or 47% of total loans as of December
31, 1997, compared to $133.739 million or 49% as of December 31, 1996. This
category consists of home mortgages which generally require a loan to value of
at least 80%. Some special guaranteed or insured real estate loan programs do
permit a higher loan to collateral value ratio. Legally binding commitments to
extend credit on real estate loans totaled $4.508 million and $2.657 million at
December 31, 1997 and 1996, respectively.
In addition to the customary real estate loans described above, Bank also had
outstanding on December 31, 1997, $3.941 million in home equity lines of credit
and $4.041 million at December 31, 1996. Credit lines normally limit the loan
to collateral value to no more than 80%. These loans are classified as consumer
loans in the table above and in Note 4 to the consolidated financial
statements.
Residential real estate lending is a highly competitive business. As of
December 31, 1997, the real estate loan portfolio reflected a wide range of
interest rate and repayment patterns, but could generally be categorized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
|--------------------1997-------------------| |-----------------1996---------------|
Percent of Percent of
---------- ----------
Amount Portfolio Yield Amount Portfolio Yield
------ --------- ----- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate
Monthly Payment $47,007 39.06% 7.86% $53,508 40.01% 7.90%
Bi-Weekly Payment 23,345 19.40% 7.82% 25,782 19.28% 7.84%
Adjustable Rate
Monthly Payment 49,409 41.05% 7.57% 53,807 40.23% 7.49%
Bi-Weekly Payment 584 0.49% 8.36% 642 0.48% 8.18%
--- ----- ----- --- ----- -----
Total $120,345 100.00% 7.76% $133,739 100.00% 7.74%
======== ======= ===== ======== ======= =====
</TABLE>
In addition to the real estate loan portfolio, Bank sold real estate loans
which it services. On December 31, 1997, the portfolio serviced consisted of
484 loans totaling $30.558 million. Total loans sold during 1997 totaled
$17.039 million.
COMMERCIAL LOANS
Commercial loans totaled $73.177 million or 28% of total loans as of
December 31, 1997, compared to $75.460 million or 28% as of December 31, 1996.
4
<PAGE> 6
Commercial loans consisted of the following types of loans at December 31:
<TABLE>
<CAPTION>
(In thousands)
|--------------1997--------------| |-------------1996---------------|
Percent of Percent of
---------- ----------
Number Amount Portfolio Number Amount Portfolio
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
SBA Guaranteed Loans 34 $4,001 5.47% 43 $4,748 6.29%
Municipal Government 61 11,553 15.79% 63 8,884 11.77%
Lines of Credit 153 17,875 24.43% 149 16,192 21.46%
Real Estate and Equipment Term Loans 303 39,748 54.31% 296 45,636 60.48%
--- ------ ------ --- ------ ------
Total 551 $73,177 100.00% 551 $75,460 100.00%
=== ======= ======= === ======= =======
</TABLE>
CONSUMER LOANS
Consumer loans totaled $64.593 million or 25% of total loans as of December 31,
1997, compared to $62.277 million or 23% as of December 31, 1996. The total
consumer loan portfolio increased 3.72% in 1997.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses represents Bank's estimate of potential credit
losses associated with the loan portfolio. The identification of loans that may
have potential losses is necessarily subjective. Therefore, a general reserve
is maintained to cover all potential losses within the entire loan portfolio.
Bank utilizes a loan grading system that helps identify, monitor and address
asset quality problems, should they arise, in an adequate and timely manner.
Each quarter, Bank reviews various factors affecting the quality of the loan
portfolio. Large credits are reviewed on an individual basis for loss
potential. Other loans are reviewed as a group based upon previous trends of
loss experience. Bank also reviews the current and anticipated economic
conditions of its lending market to determine the effect they may have on the
loss experience of the loan portfolio. The methodology described above is
consistent with the Office of the Comptroller of the Currency's guidance in
determining the adequacy of the allowance for loan losses.
At December 31, 1997, the allowance for loan losses was 1.05% of total loans
outstanding, compared to .90% at December 31, 1996. During 1997, the provision
for loan losses totaled $1.325 million compared to $66 thousand in 1996. This
increase is primarily due to increased losses and delinquencies in the consumer
loan and credit card portfolios.
5
<PAGE> 7
NONPERFORMING LOANS
Nonperforming loans are defined as loans that are greater than 90 days
delinquent or have had the accrual of interest discontinued by management.
Management continues to work diligently toward returning nonperforming loans to
an earning asset basis. Nonperforming loans for the previous three years ending
December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Nonperforming Loans $ 1,181 $ 998 $1,201
======= ===== ======
</TABLE>
Nonperforming loans were .44 times the allowance for loan losses at December
31, 1997 compared to .41 and .43 times the allowance for loan losses on
December 31, 1996 and 1995 respectively.
A loan becomes impaired when, based on current information, it is probable that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is classified as impaired,
the degree of impairment must be recognized by estimating future cash flows
from the debtor. The present value of these cash flows is computed at a
discount rate based on the interest rate contained in the loan agreement.
However, if a particular loan has a determinable market value, the creditor may
use that value. Also, if the loan is secured and considered collateral
dependent, the creditor may use the fair value of the collateral.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by 1 to 4 family
residences, residential construction loans, automobile, home equity and second
mortgage loans. Commercial loans and mortgage loans secured by other properties
are evaluated individually for impairment. When analysis of borrower operating
results and financial condition indicate that underlying cash flows of a
borrower's business are not adequate to meet its debt service requirements, the
loan is evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 30 days or more. Loans are generally moved to
nonaccrual status when 90 days or more past due. These loans are often
considered impaired. Impaired loans or portions thereof, are charged off when
deemed uncollectible.
Other real estate owned (OREO) and the related allowance for OREO losses for
the previous three years ending December 31 is as follows:
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Other real estate owned $125 $500 $4,193
Allowance for OREO losses 0 151 1,075
- --- -----
Net other real estate owned $125 $349 $3,118
==== ==== ======
</TABLE>
6
<PAGE> 8
The decline in OREO during 1996 is a result of the sale of one property owned
by Bank's wholly owned subsidiary, Trail Creek Properties, Inc. ("TCP"). This
property was sold to Indiana Blue Chip Hotel & Riverboat Casino Resort Corp. in
November, 1996 and is being used for a riverboat gaming site. The Newport
Marina property was acquired by TCP in 1990 in a foreclosure action on a
defaulted loan. The sale, consummated on November 4, 1996, resulted in a gain
of approximately $1 million, net of tax.
DEPOSITS
The primary source of funds for Bank comes from the acceptance of demand and
time deposits. However, at times Bank will use its ability to borrow funds from
the Federal Home Loan Bank when it can do so at interest rates and terms that
are superior to those required for deposited funds. Total deposits were
$264.413 million at December 31, 1997 compared to $289.180 million at December
31, 1996 or a decrease of 8.56%. Below is a table of average deposits and rates
by category for the previous three years ending December 31.
<TABLE>
<CAPTION>
(In Thousands)
Average Balance Average Rate
Outstanding for the Paid for the
Year Ended December 31 Year Ended December 31
--------------------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 45,016 $ 33,680 $ 34,186
Interest-bearing
demand deposits 37,256 53,851 51,802 1.62% 1.48% 1.47%
Savings deposits 61,089 70,386 76,127 2.24 2.25 2.25
Time deposits 147,639 132,780 125,690 5.67 5.44 5.42
------- ------- -------
Total deposits $ 291,000 $ 290,697 $ 287,805
========= ========= =========
</TABLE>
7
<PAGE> 9
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - RETIREMENT PLAN
In early 1993, the Compensation Committee of the Board initially discussed the
continuation of Horizon's employee retirement benefit program which is
maintained as an Employee Stock Ownership Plan. In August 1993, the Board of
Directors approved the continuation of this plan and authorized the transfer of
172,414 shares of Horizon's stock into the Employee Stock Ownership Plan for
future allocation to employee retirement accounts. This was reported to
shareholders in the 1993 annual report issued in April, 1994. Upon approval by
all the required regulatory agencies, Horizon issued $5,000,006 in stock on
August 26, 1994 at a price of $29 per share, the market value of the stock at
the time the transaction was approved. Under Federal regulation, the Employee
Stock Ownership Plan may pay a value equal to or less than market value for
acquired shares, but not more. Under Statement of Position 93-6 "Employers
Accounting for Employee Stock Ownership Plans" issued by the Accounting
Standards Division of the American Institute of Certified Public Accountants,
these shares are not included in outstanding shares for the purposes of
computing earnings per share and book value per share until they are committed
to be released for allocation to employee retirement accounts.
On July 4, 1996, after obtaining approval from all required regulatory
agencies, the ESOP borrowed $965,500 directly from Horizon and utilized the
proceeds to purchased 23,550 shares from unrelated shareholders. In exchange,
the ESOP issued a Term Note and Security Agreement to Horizon.
As of December 31, 1997, 106,297 shares had been allocated to employees
combined with 192,263 unallocated shares places a total of 298,560 shares in
the ESOP. Dividends paid on shares which have been allocated to employee
accounts in prior years are returned to Horizon in payment for shares not yet
allocated and as a result these dividends are returned to capital and are not
recorded as compensation expense. Dividends paid on unallocated shares as well
as any additional contributions made by Horizon to the ESOP are treated as
compensation expense, but are returned to capital as a payment for unallocated
shares. Although the stock being acquired carries an issue price of $29 per
share, the stock must be allocated at its current market value if that is
higher at the date of allocation. In this instance the cost increase is charged
to compensation expense and is also returned to capital. As a result, the cost
of providing a retirement benefit, as well as the reduction in cash for
dividends on allocated shares, are returned to Horizon's capital accounts.
Retirement programs in other companies that do not have ESOP's result in costs
only and no return of capital is realized. Therefore, although the ESOP results
in charges to expense like any retirement plan, the ESOP from a capital
retention standpoint, is of no cost to Horizon. Further, Horizon receives
special tax benefits for ESOP related dividends that are not otherwise
available. Because the costs attributable to the ESOP are returned to capital,
under Horizon's policy, the amount of such ESOP related additions may be added
to net income in computing net income for dividend purposes.
8
<PAGE> 10
As of December 31, 1997, the ESOP owned 33.62% of the outstanding shares of
Horizon and is subject to regulation and review by the Federal Reserve Bank as
a bank holding company. Also, shares owned in the ESOP are subject to the
voting decisions of the individual employees and are not otherwise voted by
management. Through their Visions and Values document, the employees have
indicated that it is their intent to maintain their ownership in Horizon as an
independent community bank. They are committed to doing those things necessary
to make it a strong financial institution which brings high value to its
stakeholders - its customers, shareholders, employees and communities. In
addition to those shares owned by the ESOP, insiders also own other shares
which would bring the ownership of insiders to a level of 38.42%, excluding
vested stock options, as of December 31, 1997.
At December 31, 1997, the ESOP paid $250,154 to Horizon in order to release
8,203 shares which were allocated to participants.
CAPITAL RESOURCES
The capital resources of Horizon and Bank remain strong and exceed regulatory
capital ratios for "well capitalized" banks at December 31, 1997. Stockholders'
equity totaled $32.757 million ($4.048 million from ESOP) as of December 31,
1997 compared to $33.508 million ($4.211 million from ESOP) as of December 31,
1996. At year end 1997, the ratio of stockholders' equity to assets was 9.11%
compared to 8.77% for 1996.
Horizon has selectively purchased shares that became available in the market
from time to time. During 1997, management purchased 22,178 shares at a cost of
$1.173 million compared to 8,778 shares at a cost of $368 thousand and 21,562
shares at a cost of $745 thousand for 1996 and 1995, respectively.
Horizon paid dividends in the amount of $1.80 per share in 1997, $1.40 per
share in 1996 and $1.20 per share in 1995. The dividend pay-out ratio
(dividends as a percent of net income) was 73% during 1997 as compared to 27%
and 29% in 1996 and 1995, respectively. The dividend pay-out ratio is high in
1997 because net income includes a provision for loan losses of $1.325 million
and low in 1996 and 1995 because net income includes the gain on sale of OREO
of approximately $1 million, net of tax, in 1996 and the Federal and State tax
refunds of $1.252 million, including interest, in 1995. The dividend pay-out
ratio excluding provision for loan losses, the OREO gain and tax refunds would
be 41%, 37% and 50% in 1997, 1996 and 1995, respectively. Horizon intends to
target a dividend pay-out ratio of 35-45% in the future as determined by
quarterly earnings, capital levels and regulatory approvals. For additional
information regarding dividend conditions, see Note 1 of the Notes to the
Consolidated Financial Statements.
As of December 31, 1997, management is not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented, would
have or are reasonably likely to have a material effect on Horizon's liquidity,
capital resources or operations.
9
<PAGE> 11
IMS INVESTMENT MANAGEMENT
On October 1, 1996, the Bank formed a wholly-owned subsidiary, IMS Investment
Management, N.A. (IMS). IMS manages the majority of the trust accounts
previously managed by Bank. Assets under management of IMS had a book value of
$311 million at December 31, 1997 compared to $351 million at December 31,
1996. This represents a 11.4% decrease from 1996.
The book value of assets held in the IMS at December 31, 1997 by asset type are
as follows:
<TABLE>
<CAPTION>
(in thousands) Book Value Percentage
---------- ----------
<S> <C> <C>
Cash $746 0.24%
Money Market Funds 82,992 26.69%
Government and Agency Bonds 67,872 21.82%
Municipal Bonds 20,502 6.59%
Corporate Bonds 32,702 10.51%
Common and Preferred Stock 81,975 26.36%
Mutual Funds 24,221 7.79%
------ -----
Total $311,010 100.00%
======== =======
</TABLE>
IMS manages a variety of types of investment accounts including personal
trusts, agencies, estates and guardianships, corporate agencies and employee
benefit agencies and trusts. The total book values and market values of each of
these types of accounts at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) Book Value Percentage Market Value Percentage
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Personal Agencies $92,110 29.61% $103,402 28.41%
Estates and Guardianships 1,205 0.39% 875 0.24%
Personal Trusts 69,845 22.46% 91,059 25.01%
Employee Benefit 96,255 30.95% 116,622 32.04%
Corporate Agency 51,587 16.59% 51,587 14.17%
Other 8 0.00% 487 0.13%
- ----- --- -----
Total $311,010 100.00% $364,032 100.00%
======== ======= ======== =======
</TABLE>
10
<PAGE> 12
Personal and Corporate Agencies total 46.20% of the book value of the accounts
administered by the Trust Department at December 31, 1997. In an agency
account, IMS typically holds assets for a client and maintains records of these
assets. IMS may or may not have the responsibility for making investment
decisions on this type of account. Personal trusts consist of 22.46% of the
assets managed by IMS. In a personal trust, IMS is named trustee for the assets
in the trust. There may be an estate plan included in this type of trust and
the investment decisions may be made by either IMS or the grantor of the
personal trust. Employee benefit agencies and trusts are 30.95% of the assets
in IMS. Responsibilities of IMS for employee benefit accounts normally consist
of maintaining records for each plan participant, complying with regulations
governing retirement plans and may include making investment decisions.
RESULTS OF OPERATIONS
NET INCOME
Consolidated net income was $1.721 million or $2.42 per share for 1997 compared
to $3.824 million or $5.19 per share and $3.039 million or $4.05 per share in
1996 and 1995, respectively. Because of the unique qualities of ESOP derived
costs discussed above, these earnings from a capital retention standpoint could
be comparable to a non-ESOP performance of $2.245 million or $3.16 per share
for 1997, $4.409 million or $5.98 per share for 1996 and $3.631 million or
$4.84 per share for 1995. In November, 1996, a gain on sale of OREO was
recorded totaling approximately $1 million or $1.35 per share, net of tax. In
March 1995, Horizon received a Federal income tax refund of $954 thousand plus
interest of $298 thousand. The total $1.252 million or $1.67 per share is
included in 1995 net income.
NET INTEREST INCOME
The primary source of earnings for Horizon is net interest income. Net interest
income is the difference between what Horizon has earned on assets it has
invested and the interest paid on deposits and other funding sources. The net
interest margin is net interest income expressed as a percentage of average
earning assets. Horizon's earning assets consist of loans, investment
securities and interest bearing balances in banks.
11
<PAGE> 13
<TABLE>
<CAPTION>
--------------1997------------ --------------1996--------------
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans - total (1) (3) $269,348 $24,574 9.12% $256,580 $23,096 9.00%
Taxable investment securities 55,963 3,968 7.09% 67,833 4,504 6.64%
Nontaxable investment securities (2) 10,000 435 4.35% 10,138 455 4.49%
Interest-bearing balances and 1,348 60 4.45% 968 46 4.75%
money market investments (4)
Bankers Acceptances
Federal funds sold 4,170 228 5.47% 2,476 132 5.33%
----- --- ----- ----- --- -----
Total interest-earning assets 340,829 29,265 8.59% 337,995 28,233 8.35%
------- ------ ----- ------- ------ -----
Noninterest-earning assets
Cash and due from banks 13,874 12,879
Allowance for loan losses (2,320) (2,655)
Other assets 21,799 19,547
------ ------
Total assets $374,182 $367,766
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings deposits 61,089 1,371 2.24% 70,386 1,587 2.25%
Interest-bearing demand deposits 37,256 605 1.62% 53,851 798 1.48%
Time deposits 147,639 8,367 5.67% 132,780 7,221 5.44%
Short-term borrowings 1,911 110 5.76% 13,529 713 5.27%
Long-term debt 43,493 2,484 5.71% 27,306 1,481 5.42%
------ ----- ----- ------ ----- -----
Total interest-earning liabilities 291,388 12,937 4.44% 297,852 11,800 3.96%
------- ------ ----- ------- ------ -----
Noninterest-bearing liabilities
Demand deposits 45,016 33,680
Other liabilities 3,771 3,479
Stockholder's equity 34,007 32,755
------ ------
Total liabilities and stockholders' equity $374,182 $367,766
======== ========
Net interest income $16,328 $16,433
======= =======
Net interest income as a percent of interest-earning assets 4.79% 4.86%
==== ====
<CAPTION>
---------------1995-------------
Average Yield/
(In thousands) Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans - total (1) (3) $226,198 $20,228 8.94%
Taxable investment securities 82,348 5,422 6.58%
Nontaxable investment securities (2) 12,233 519 4.24%
Interest-bearing balances and 1,044 60 5.75%
money market investments (4)
Bankers Acceptances 0
Federal funds sold 592 33 5.57%
--- -- -----
Total interest-earning assets 322,415 26,262 8.15%
------- ------ -----
Noninterest-earning assets
Cash and due from banks 13,310
Allowance for loan losses (2,716)
Other assets 20,303
------
Total assets $353,312
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings deposits 76,127 1,712 2.25%
Interest-bearing demand deposits 51,802 760 1.47%
Time deposits 125,690 6,811 5.42%
Short-term borrowings 15,948 939 5.89%
Long-term debt 16,726 890 5.32%
------ --- -----
Total interest-earning liabilities 286,293 11,112 3.88%
------- ------ -----
Noninterest-bearing liabilities
Demand deposits 34,186
Other liabilities 2,719
Stockholder's equity 30,114
------
Total liabilities and stockholders' equity $353,312
========
Net interest income $15,150
=======
Net interest income as a percent of interest-earning assets 4.70%
====
<FN>
(1) Nonaccruing loans for the purpose of the computations above are
included in the daily average loan amounts outstanding. Loan totals
are shown net of unearned income and deferred loan fees.
(2) Yields are not presented on a tax-equivalent basis.
(3) Loan fees and late fees included in interest on loans aggregated
$1,248,250, $1,122,390 and $1,056,404 in 1997, 1996 and 1995,
respectively.
(4) Horizon has no foreign office and, accordingly, no assets or
liabilities attributable to foreign operations. Horizon's subsidiary
bank had no funds invested in Eurodollar Certificates of Deposit a
December 31, 1997.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
1997- 1996 1996 - 1995
Increase/(Decrease) Increase/(Decrease)
(In thousands) Change Change Change Change
Total Due To Due To Total Due To Due To
INTEREST INCOME Change Volume Rate Change Volume Rate
--------------- ------ ------- ----- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Loans - total $1,478 $1,162 $316 $2,868 $2,734 $134
Taxable investment securities (536) (827) 291 (918) (963) 45
Nontaxable investment securities (20) (6) (14) (64) (93) 29
Interest bearing balances & money 14 17 (3) (14) (4) (10)
market investments
Federal Funds Sold 96 93 3 99 101 (2)
-- -- - --- ---
Total interest income $1,032 $439 $593 $1,971 $1,775 $196
------ ---- ---- ------ ------ ----
INTEREST EXPENSE
----------------
Savings deposits $(216) $(209) $(7) $(125) $(129) $4
Interest bearing demand deposits (193) (264) 71 38 30 8
Time deposits 1,146 833 313 410 385 25
Short-term borrowings (603) (663) 60 (226) (134) (92)
Long-term debt 1,003 921 82 591 574 17
----- --- -- --- --
Total interest expense 1,137 618 519 688 726 (38)
----- --- --- --- --- ----
NET INTEREST EARNINGS $(105) $(179) $74 $1,283 $1,049 $234
====== ====== === ====== ====== ====
</TABLE>
<PAGE> 15
Horizon's average earning assets were $340.829 million in 1997 compared to
$337.995 million in 1996 and $322.415 million in 1995. The net interest margin
for 1997 was 4.79% compared to 4.86% and 4.70% in 1996 and 1995, respectively.
The decrease in net interest margin from 1996 to 1997 was due to the increase
in rate and volume of time deposits and long term debt outpacing the increase
in rate and volume of loans.
The increase in net interest margin from 1995 to 1996 was primarily related to
the increased volume of loans, especially consumer loans offset slightly by
increased volume of certificates of deposits and long term debt.
NONINTEREST INCOME
The major components of noninterest income consist of service charges on
deposit accounts and fiduciary fees. Service charges on deposit accounts are
based upon: a) recovery of direct operating expenses associated with providing
the service, b) allowing for a profit margin that provides an adequate return
on assets and stockholders' equity and c) competitive factors within Bank's
markets. Service charges on deposits were $2.020 million, $1.573 million and
$1.441 million for 1997, 1996 and 1995, respectively.
Net security gains were $9 for 1997 compared to $0 and $46 thousand for 1996
and 1995, respectively. Fiduciary fees were $2.423 million in 1997 compared to
$2.094 million and $1.769 million in 1996 and 1995, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $17.689 million in 1997 compared to $16.694 million
and $15.931 million in 1996 and 1995, respectively. The increase in 1997 was a
result of increased occupancy, data processing and equipment, supplies and
advertising expenses offset by a decrease in salaries and benefits. The
majority of these expenses were incurred relative to the change of the Bank's
name, investments in technology, the expansion of sales offices in Porter
County and the new South Franklin building. The increase in 1996 was a result
of increased salaries and benefits and data processing and equipment expense
offset by a decrease in loss on other real estate owned.
Salaries and benefits decreased 4.09% during 1997 compared to an increase of
3.67% for 1996 and an increase of 13.72% for 1995. The 1997 decrease was
primarily the result of reduced expenses related to the ESOP and Stock Option
Plans. The 1995 increase is primarily the result of an increase in group health
insurance costs, termination benefits, ESOP expense and stock appreciation
rights expense offset by the decrease in bonus expense. The Bank developed and
implemented a staffing model to monitor productivity and determine the optimum
number of employees per division and reached these levels in early 1996.
14
<PAGE> 16
Data processing and equipment expense increased 18.79% in 1997, 22.56% in 1996,
4.4% in 1995. The 1997 and 1996 increases are due to investments in technology
that caused an increase in depreciation expense and an increase in support and
maintenance expense.
Total other expenses increased 11.39%, 4.89% and 9.44% in 1997, 1996 and 1995,
respectively. The primary factors contributing to the 1997 increase in other
expense were: 1) $273 increase in advertising expense, primarily related to the
change of the Bank's name, 2) $195 thousand increase in supplies and printing
expenses and 3) $154 thousand increase in outside services and consultants. The
primary factors contributing to the 1996 increase in other expense were: 1) $70
thousand increase in supplies and printing expenses, 2) $75 increase in
advertising expenses, 3) $199 thousand increase in corporate expense, 4) $170
thousand increase in losses, including frauds and forgeries and 5) $332
thousand decrease in deposit insurance expense.
INCOME TAXES
The income tax provision totaled $584 thousand in 1997 compared to $1.599
million and $167 thousand in 1996 and 1995, respectively. The effective tax
rate was 25.34%, 29.49% and 5.21% for 1997, 1996, and 1995, respectively.
Horizon received a Federal income tax refund during the first quarter of 1995
totaling $1.252 million including interest of $298 thousand. In 1993, Horizon
filed several amended tax returns to obtain refunds of Federal taxes paid in
prior periods dating back to 1985. Excluding the portion of the tax refund that
was a direct reduction of tax expense in 1995, the effective tax rate would
have been 34.97%.
LIQUIDITY AND RATE SENSITIVITY MANAGEMENT
Management and the Board of Directors meet regularly to review both the
liquidity and rate sensitivity position of Horizon. Effective asset and
liability management ensures Horizon's ability to monitor the cash flow
requirements of depositors along with the demands of borrowers and to measure
and manage interest rate risk. Horizon utilizes an interest rate risk
assessment model designed to highlight sources of existing interest rate risk
and consider the effect of these risks on strategic planning. Management
maintains an essentially balanced ratio of interest sensitive assets to
liabilities in order to protect against the effects of wide interest rate
fluctuations.
LIQUIDITY
The Bank maintains a stable base of core deposits provided by long standing
relationships with consumers and local businesses. These deposits are the
principal source of liquidity for Horizon. Other sources of liquidity for
Horizon include earnings, loan repayment, investment security sales and
maturities, sale of real estate loans and borrowing relationships with
correspondent banks, including the Federal Home Loan Bank (FHLB). During 1997,
cash flows were generated from earnings of $1.7 million, a
15
<PAGE> 17
$11.8 million decrease in investment securities, a $17.0 million sale of loans
and a $3.2 million increase in short term borrowings. Cash flows were used for
an $4.8 million increase in loan demand, a $3.7 million purchase of premises
and equipment and a $24.8 million decrease in deposits. The net cash position
increased $18 thousand, primarily in cash and due from banks and Federal funds
sold.
INTEREST SENSITIVITY
The degree by which net interest income may fluctuate due to changes in
interest rates is monitored by Horizon using computer simulation modeling,
incorporating not only the current GAP position but the effect of expected
repricing of specific financial assets and liabilities. When repricing
opportunities are not properly aligned, net interest income may be affected
when interest rates change. Forecasting results of the possible outcomes
determine the exposure of interest rate risk inherent in Horizon's balance
sheet. The goal is to manage imbalanced positions that arise when the total
amount of assets repricing or maturing in a given time period differs
significantly from liabilities that are repricing or maturing in the same time
period. The theory behind managing the difference between repricing assets and
repricing liabilities is to have more assets repricing in a rising rate
environment and more liabilities repricing in a declining rate environment. At
December 31, 1997, Horizon had a negative GAP position of 1:.96 This indicates
that the total amount of assets repricing within one year were 96% of the total
amount of liabilities repricing within the same time period. This compares to a
negative GAP position of 1:.82 at December 31, 1996.
<TABLE>
<CAPTION>
Rate Sensitivity
Greater than Greater than
3 months 6 months
and and
3 months less than less than Greater
(in thousands) or less 6 months 1 year than 1 year Total
------- ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Loans $55,671 $19,920 $37,084 $144,857 $257,532
Money Market Investments 852 852
Interest bearing balances with Banks 219 219
Investment securities and investment 15,198 4,858 11,955 28,074 60,085
securities available for sale
Other assets 41,063 41,063
--------------------------------------------------------------------
Total assets $71,721 $24,778 $49,039 $214,213 $359,751
====================================================================
Non-interest bearing deposits $61,474 $61,474
Interest bearing deposits $47,427 $25,951 $18,007 111,554 202,939
Borrowed funds 36,000 11,000 11,000 58,000
Other liabilities 4,581 4,581
Stockholders equity 32,757 32,757
--------------------------------------------------------------------
Total liabilities and stockholders equity $ 83,427 $ 36,951 $29,007 $210,366 $359,751
====================================================================
GAP $(11,706) $(12,173) $20,032 $3,847
Cumulative GAP (11,706) (23,879) (3,847) 0
</TABLE>
16
<PAGE> 18
Included in the gap analysis are certain interest-bearing demand accounts and
savings accounts. These interest-bearing accounts are subject to immediate
withdrawal. However, Horizon considers approximately 70% of these deposits to
be insensitive to gradual changes in interest rates and generally to behave
like deposits with longer maturities based upon historical experience.
Accordingly, Horizon has considered the balances of interest-bearing demand and
savings account deposits which totaled $49.795 million at December 31, 1997 to
be non-rate sensitive.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon's primary market risk exposure is interest rate risk. Interest rate
risk (IRR) is the risk that Horizon's earnings and capital will be adversely
affected by changes in interest rates. The primary approach to IRR management
is one which focuses on adjustments to the asset/liability mix in order to
limit the magnitude of IRR.
Horizon's exposure to interest rate risk is due to repricing or mismatch risk,
basis risk, embedded options risk and yield curve risk. Repricing risk is the
risk of adverse consequence from a change in interest rates that arise because
of differences in the timing of when those interest rate changes affect
Horizon's assets and liabilities. Basis risk is the risk that the spread, or
rate difference, between instruments of similar maturities will change. Options
risk arises whenever products give the customer the right, but not the
obligation, to alter the quantity or timing of cash flows. Yield curve risk is
the risk that changes in prevailing interest rates will affect instruments of
different maturities by different amounts. Horizon's objective is to remain
reasonably neutral with respect to IRR. Horizon utilizes a variety of
strategies to maintain this position including the sale of mortgage loans on
the secondary market, varying maturities of FHLB advances, certificates of
deposit funding and investment securities.
The table which follows provides information about Horizon's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. Horizon had no derivative financial instruments or trading portfolio as
of December 31, 1997. The table incorporates Horizon's internal system
generated data related to the maturity and repayment/withdrawal of interest
earning assets and interest bearing liabilities. For loans, securities and
liabilities with contractual maturities, the table presents principal cash
flows and related weighted average interest rates by contractual maturities as
well as the historical experience of Horizon related to the impact of interest
rate fluctuations on the prepayment of residential loans and mortgage backed
securities. From a risk management perspective, Horizon believes that repricing
dates are more relevant than contractual maturity dates when analyzing the
value of financial instruments. For deposits with no contractual maturity
dates, the table presents principal cash flows and weighted average rate, as
applicable, based upon Horizon's experience and management's judgment
concerning the most likely withdrawal behaviors.
17
<PAGE> 19
<TABLE>
<CAPTION>
Quantitative Disclosures of Market Risk
- ---------------------------------------
2003 and Fair Value
1998 1999 2000 2001 2002 beyond Total 12/31/97
---- ---- ---- ---- ---- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed interest rate loans $54,203 $33,492 $21,855 $17,044 $11,291 $23,895 $161,780 $160,781
Average interest rate 9.23% 9.07% 8.46% 8.31% 8.16% 8.26% 8.78%
Variable interest rate loans 24,062 5,016 4,662 3,495 3,671 57,548 98,454 98,186
Average interest rate 10.11% 8.21% 7.80% 7.48% 7.24% 7.84% 8.38%
Total loans 78,265 38,508 26,517 20,539 14,962 81,443 260,234 258,967
Average interest rate 9.50% 8.95% 8.34% 8.17% 7.94% 7.97% 7.13%
Securities 20,078 10,765 7,426 6,121 3,796 11,899 60,085 $60,394
Average interest rate 7.14% 6.72% 6.63% 6.70% 6.65% 5.59% 6.62%
Other interest bearing assets 852 219 1,071 1,071
Average interest rate 5.50% 5.50% 5.50%
Total Earning Assets $99,195 $49,273 $33,943 $26,660 $18,758 $93,561 $321,390 $320,432
Average interest rate 8.99% 8.47% 7.97% 7.83% 7.68% 7.66% 6.75%
</TABLE>
18
<PAGE> 20
Quantitative Disclosures of Market Risk (continued)
- ---------------------------------------------------
<TABLE>
<CAPTION>
2003 and Fair Value
1998 1999 2000 2001 2002 beyond Total 12/31/97
---- ---- ---- ---- ---- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive liabilities:
---------------------------
Non-interest bearing deposits $615 $307 $154 $60,398 $61,474 $61,474
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00%
NOW accounts 166 83 42 16,314 16,605 16,605
Average interest rate 1.47% 1.47% 1.47% 1.47% 1.47%
Savings and Money Market accounts 545 273 136 53,578 54,532 54,532
Average interest rate 2.25% 2.25% 2.25% 2.25% 2.25%
Certificates of Deposit 70,044 42,583 16,792 2,383 131,802 136,850
Average interest rate 5.66% 5.79% 5.69% 5.49% 5.70%
Total Deposits 71,370 43,246 17,124 2,383 130,290 264,413 269,461
Average interest rate 5.55% 5.70% 5.58% 5.49% 0.79% 2.82%
Fixed interest rate borrowings 57,000 57,000 57,060
Average interest rate 5.76% 5.76%
Variable interest rate borrowings 1,000 1,000 1,005
Average interest rate 7.71% 7.71%
Total Funds $129,370 $43,246 $17,124 $2,383 $130,290 $322,413 $327,526
Average interest rate 5.66% 5.70% 5.58% 5.49% 0.79% 3.36%
</TABLE>
19
<PAGE> 21
PENDING ACQUISITION
- -------------------
On October 1, 1997, Horizon's wholly owned subsidiary, Horizon Bank, N.A.
entered into an Agreement, whereby the Bank will acquire all the assets and
liabilities of Phoenix Insurance Services, Inc. The acquisition is contingent
upon Bank receiving insurance licenses from the states of Indiana, Illinois and
Michigan. This transaction is expected to be consummated during the second
quarter of 1998.
YEAR 2000
- ---------
During 1997, Horizon initiated a review of all hardware and software utilized
to confirm that all will function properly in the Year 2000. Currently, all
vendors who have responded indicate that their hardware or software is or will
be Year 2000 compliant by the end of 1998.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. SFAS 130 is effective
for fiscal years beginning after December 15, 1997. Management is currently
considering the impact of SFAS 130, but does not believe it will have a
material effect on the Company's consolidated financial statements.
In June 1997, FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for public
companies to report certain financial information about operating segments.
This statement also requires public companies to report certain information
about their products and services and the geographic areas in which they
operate. SFAS is effective for financial statements for fiscal years beginning
after December 15, 1997. At this time, management is evaluating the statement
and has not determined if the new reporting provisions will require
supplemental disclosures by the Company.
20
<PAGE> 22
<TABLE>
<CAPTION>
December 31
CONSOLIDATED BALANCE SHEET (THOUSANDS)
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $19,506 $19,551
Money market investment 852 789
------------- -------------
Total cash and cash equivalents 20,358 20,340
Short-term investments-Interest-bearing balances in banks 219 211
Investment securities available for sale, net 48,638 59,041
Investment securities held to maturity (market value $11,756 - 1997, $12,838 - 1996) 11,447 12,810
Loans held for sale, at cost which approximates market value 2,119 1,034
Total loans held to maturity 258,115 271,476
Allowance for loan losses (2,702) (2,435)
------------- -------------
Net loans held to maturity 255,413 269,041
Premises and equipment, net 16,144 14,053
Accrued interest receivable 2,264 2,216
Other assets 3,149 3,292
------------- -------------
Total assets $359,751 $382,038
============= =============
LIABILITIES
Deposits
Noninterest-bearing $61,474 $46,050
Interest-bearing 202,939 243,130
------------- -------------
Total deposits 264,413 289,180
Short-term borrowings 16,000 12,849
Federal Home Loan Bank Advances 42,000 41,500
Accrued interest payable 674 590
Other liabilities 3,907 4,411
------------- -------------
Total liabilities 326,994 348,530
------------- -------------
Equity received from contributions and dividends to the ESOP 4,048 4,211
STOCKHOLDERS' EQUITY
Common stock: $1 stated value, 5,000,000 shares authorized and
1,034,428 shares issued, less ESOP shares of 307,538 and 319,664 at 720 708
December 31, 1997 and 1996.
Additional paid-in capital 7,763 7,962
Retained earnings 24,355 23,898
Unrealized gain/loss on securities available for sale (net of tax) 400 85
Less treasury stock, at cost - 146,263 shares - 1997, 124,085 shares - 1996 (4,529) (3,356)
------------- -------------
Total stockholders' equity 28,709 29,297
------------- -------------
Total liabilities and stockholder's equity $359,751 $382,038
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $24,574 $23,096 $20,228
Interest and dividends on investments
Taxable 4,256 4,682 5,515
Nontaxable 435 455 519
----------- ------------ -----------
Total interest income 29,265 28,233 26,262
----------- ------------ -----------
INTEREST EXPENSE
Interest on deposits 10,343 9,605 9,284
Interest on Federal funds purchased and securities
sold under agreements to repurchase 110 714 938
Interest on Federal Home Loan Bank advances 2,484 1,481 890
----------- ------------ -----------
Total interest expense 12,937 11,800 11,112
----------- ------------ -----------
NET INTEREST INCOME 16,328 16,433 15,150
PROVISION FOR LOAN LOSSES 1,325 66
----------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,003 16,367 15,150
----------- ------------ -----------
NONINTEREST INCOME
Service charges on deposits 2,020 1,573 1,441
Fiduciary income 2,423 2,094 1,769
Gain on sale of other real estate owned 9 1,609 45
Income from Insurance Company 293 221 159
Other Income 246 253 573
----------- ------------ -----------
Total noninterest income 4,991 5,750 3,987
----------- ------------ -----------
NONINTEREST EXPENSE
Salaries and employee benefits 8,316 8,671 8,364
Occupancy expense of Company premises, net of rental income 1,346 1,164 1,017
Data processing and equipment expenses 2,504 2,108 1,720
Loss on disposal of fixed assets 274
Loss on other real estate owned 18 55 353
Other expenses 5,231 4,696 4,477
----------- ------------ -----------
Total noninterest expense 17,689 16,694 15,931
----------- ------------ -----------
INCOME BEFORE INCOME TAXES 2,305 5,423 3,206
PROVISION FOR INCOME TAXES 584 1,599 167
----------- ------------ -----------
NET INCOME $1,721 $3,824 $3,039
=========== ============ ===========
Basic Earnings per common share $2.42 $5.19 $4.05
</TABLE>
The accompanying notes are an integral part of these financial statements
22
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Thousands, except per share data)
Unrealized
Gain/loss on
Additional Securities Total
Common Paid-In Retained Available for Treasury Stockholders'
Stock Capital Earnings Sale Stock Equity
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $732 $9,238 $18,961 $(2,327) $(2,243) $24,361
-----------------------------------------------------------------------------------------------------------------------------
Net Income 3,039 3,039
Cash Dividends ($1.20 per share) (895) (895)
Purchase of 21,562 shares of treasury stock (745) (745)
Change in unrealized gain/(loss) on 2,793 2,793
marketable equity securities
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $732 $9,238 $21,105 $466 $(2,988) $28,553
-----------------------------------------------------------------------------------------------------------------------------
Net Income 3,824 3,824
Cash Dividends ($1.40 per share) (1,031) (1,031)
Purchase of 8,778 shares of treasury stock (368) (368)
Net purchases and distributions with ESOP (24) (1,339) (1,363)
Tax benefit of ESOP dividend deduction 63 63
Change in unrealized gain/(loss) on (381) (381)
marketable equity securities
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $708 $7,962 $23,898 $85 $(3,356) $29,297
-----------------------------------------------------------------------------------------------------------------------------
Net Income 1,721 1,721
Cash Dividends ($1.80 per share) (1,264) (1,264)
Purchase of 22,178 shares of treasury stock (1,173) (1,173)
Net purchases and distributions with ESOP 12 (270) (258)
Tax benefit of ESOP dividend deduction 71 71
Change in unrealized gain/(loss) on 315 315
marketable equity securities
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $720 $7,763 $24,355 $400 $(4,529) $28,709
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
23
<PAGE> 25
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash from operating activities:
Net income $1,721 $3,824 $3,039
Depreciation 1,370 1,040 892
Net (accretion)/amortization 158 312 179
Additional paid in capital from release of ESOP shares 184 244 172
Provision for loan losses 1,325 66
Gains on sales of loans (56)
Security gains (9) (46)
(Gain)/loss on disposal of fixed assets 274 (2) 24
Gain on sale of other real estate owned (9) (1,609) (45)
Loss on other real estate owned 18 55 353
Benefit of deferred taxes 29 357 117
Change in deferred loan fees (57) (52) (26)
Change in unearned income 54 51 (262)
Change in interest receivable (48) 684 (93)
Change in interest payable 84 23 101
Change in other assets (634) 2,825 697
Change in other liabilities (504) 1,289 452
------------- ------------- -------------
Net cash provided by operating activities 3,900 9,107 5,554
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 1,009 15,607
Proceeds from maturities, calls and principal repayments of investment
securities-available for sale 11,662 17,969 16,923
Proceeds from maturities, calls and principal repayments of investment
securities-held to maturity 3,315 5,555 5,926
Purchase of investment securities-available for sale (1,887) (2,993) (19,757)
Purchase of investment securities-held to maturity (1,962) (6,217) (2,622)
Change in short-term investments (8) (5) (106)
Change in loans (4,766) (37,452) (17,138)
Purchase of loans (1,379) (344) (1,260)
Proceeds from sales of loans 17,039 6,392 353
Recoveries on loans previously charged-off 383 149 515
Premises and equipment expenditures (3,735) (4,064) (1,667)
-------------- ------------- ------------
Net cash provided by (used in) investing activities 19,671 (21,010) (3,226)
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in deposits (24,767) 196 (6,800)
Dividends paid (1,264) (1,031) (895)
Change in short-term borrowings 3,151 (8,720) (3,124)
Purchase of treasury stock (1,173) (368) (745)
Change in Federal Home Loan Bank advance 500 20,100 3,000
------------- ------------ --------------
Net cash provided by (used in) financing activities (23,553) 10,177 (8,564)
-------------- ------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 18 (1,726) (6,236)
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,340 22,066 28,134
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,358 $20,340 $21,898
============== ============= ============
CASH PAID DURING THE YEAR FOR:
Interest $10,427 $11,823 $11,011
Income taxes 661 1,714 (202)
</TABLE>
24
<PAGE> 26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
NATURE OF BUSINESS - The consolidated financial statements include
Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A.
(Bank), HBC Insurance Group, Inc. (Insurance Company) and The Loan Store, Inc.
Bank is a full-service commercial bank offering a broad range of commercial and
retail banking and other services incident to banking. Bank's wholly-owned
subsidiary, IMS Investment Management, Inc. (IMS) offers corporate and
individual trust and agency services and investment management services. Bank
maintains five facilities located within LaPorte County, Indiana and four
facilities located in Porter County, Indiana. The Insurance Company offers
credit insurance. The net income generated from the insurance operation are not
significant to the overall operations of Horizon. The Loan Store, Inc. is
engaged in the business of retail lending and operates facilities in
Merrillville, Highland, South Bend and Michigan City, Indiana. Horizon conducts
no business except that incident to its ownership of the subsidiaries.
BASIS OF REPORTING - The consolidated financial statements include the
accounts of Horizon and subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements,
as well as the reported amounts of income and expenses during the reported
periods. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant changes relate to
the determination of the allowance for loan losses.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Horizon & Bank designate a
portion of their investment portfolio as available for sale based on
management's plans to use such securities for asset and liability management,
liquidity, and not to hold such securities as long-term investments. Management
repositions the portfolio to take advantage of future expected interest rate
trends when Horizon's long-term profitability can be enhanced. Investment
securities available for sale and marketable equity securities, comprised
primarily of Federal Home Loan Bank and Federal Reserve stock, are carried at
estimated fair value and any net unrealized gains/losses (after tax) on these
securities are reflected as a separate component of stockholders' equity.
Gains/losses on the disposition of securities available for sale are recognized
at the time of the transaction and are determined by the specific
identification method.
INVESTMENT SECURITIES HELD TO MATURITY- Investment securities are
purchased with the intent and ability to hold to maturity, and are carried at
cost and adjusted for amortization of premiums and accretion of discounts.
Gains/losses on the disposition of securities held to maturity are recognized
at the time of the transaction and are determined by the specific
identification method.
LOANS HELD FOR SALE - Loans held for sale are reported at the lower of
cost or market value in the aggregate.
INTEREST AND FEES ON LOANS - Interest on commercial, mortgage and
installment loans is recognized over the term of the loans based on the
principal amount outstanding. When principal or interest is past due 90 days or
more, and the loan is not well secured and it is in the process of collection,
or when serious doubt exists as to the collectability of a loan, the accrual of
interest is discontinued. Loan origination fees, net of direct loan origination
costs, are deferred and recognized over the life of the loan as a yield
adjustment.
25
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - Bank grants commercial, real estate and
consumer loans to customers located primarily in LaPorte County and Porter
County in Northwest Indiana. Commercial loans make up approximately 28% of the
loan portfolio and are secured by both real estate and business assets. These
loans are expected to be repaid from cash flow from operations of businesses.
Real estate loans make up approximately 47% of the loan portfolio and are
secured by both commercial and residential real estate. Installment loans make
up approximately 25% of the loan portfolio and are primarily secured by
consumer assets.
ALLOWANCE FOR LOAN LOSSES - An allowance for loan losses is established
and maintained because some loans may not be repaid in full. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on
past loss experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates which are subject to change over time. Actual
losses may vary from current estimates and the amount of the provision may be
either greater than or less than actual net charge-offs.
LOAN IMPAIRMENT - When analysis determines borrower operating results
and financial condition are not adequate to meet its debt service requirements,
the loan is evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 30 days or more. Loans are generally moved to
non-accrual status when 90 days or more past due. These loans are also often
considered impaired. Impaired loans, or portions thereof are charged-off when
deemed uncollectible. This typically occurs when the loan is 120 or more days
past due.
Loans are considered impaired if full principal or interest payments are
not made in accordance with the original terms of the loan. Impaired loans are
measured and carried at the lower of cost or the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. Smaller balance homogenous loans are evaluated
for impairment in aggregate. Such loans include residential first mortgage
loans secured by 1- 4 family residences, residential construction loans and
automobile, home equity and second mortgages. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
PREMISES AND EQUIPMENT - Buildings and major improvements are
capitalized and depreciated using primarily the straight-line method with
useful lives ranging from 3 to 40 years. Furniture and equipment are
capitalized and depreciated using primarily the straight-line method with
useful lives ranging from 3 to 20 years. Maintenance and repairs are expensed
as incurred.
26
<PAGE> 28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
OTHER REAL ESTATE OWNED - Other real estate owned is carried at the
lower of cost or fair value, less selling costs, and is included in other
assets. Any reduction to fair value from the carrying value of the related
loans at the time of acquisition is charged to the allowance for loan losses.
Subsequent reductions in fair value, and gains or losses on sales, are
recognized in earnings in the period the reduction in value is determined or
the sale is consummated. Other real estate owned, net of allowance, included in
other assets, totaled $125,000 and $349,000 at December 31, 1997 and 1996,
respectively.
SERVICING RIGHTS - Prior to adopting Financial Accounting Standard No.
122 at the beginning of 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. Subsequent to adopting this
standard, servicing rights represent both purchased rights and the allocated
value of servicing rights retained on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Excess servicing receivable is reported when a loan sale results in servicing
in excess of normal amounts, and is expensed over the life of the servicing on
the interest method.
INCOME TAXES - Horizon files annual consolidated income tax returns.
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes " requires an asset and liability approach for accounting for
income taxes. Its objective is to recognize the amount of taxes payable or
refundable for the current year, and deferred tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amount of assets and liabilities and their respective tax
bases. The measurement of tax assets and liabilities is based on enacted tax
laws. Deferred tax assets may be reduced, if necessary, by the amount of such
benefits that are not expected to be realized based on available evidence.
TRUST ASSETS AND INCOME - Property, other than cash deposits, held in a
fiduciary or agency capacity is not included in the consolidated balance sheets
since such property is not owned by Horizon. Income from trust activities is
recognized on a cash basis, which is not materially different from the accrual
method.
EARNINGS PER COMMON SHARE AND DIVIDENDS DECLARED PER COMMON SHARE -
Effective December 15, 1997, Horizon adopted Statement of Financial Accounting
Standard (SFAS) 128, "Earnings Per Share." SFAS 128 establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. SFAS 128 replaces the
presentation of primary EPS with earnings per common share (basic EPS). Basic
EPS is computed by dividing net income by the weighted average number of common
shares outstanding for the period. SFAS 128 also requires presentation of EPS
assuming dilution (diluted EPS). Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Horizon has no potential dilute
instruments. The number of shares used in the computation of basic earnings per
share is 710,967 for 1997, 736,887 for 1996, and 750,286 for 1995.
Regulations of the Comptroller of the Currency limit the amount of
dividends that may be paid by a national bank to its parent holding company
without prior approval of the Comptroller of the Currency. According to these
regulations, as of December 31, 1997 approximately $2,479,000 of additional
dividends may be paid by Bank to Horizon without prior approval of the
Comptroller of the Currency. Additionally, the Federal Reserve Board limits the
amount of dividends that may be paid by Horizon to its stockholders under its
capital adequacy guidelines.
CONSOLIDATED STATEMENT OF CASH FLOWS - For purposes of reporting cash
flows, cash and cash equivalents are defined to include cash and due from
banks, money market investments and Federal funds sold with maturities of 1 day
or less. Horizon reports net cash flows for customer loan transactions, deposit
transactions, short-term investments and short-term borrowings.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
and 1995 financial statements to be comparable to 1997.
27
<PAGE> 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------
The estimated fair value amounts were determined using available market
information, current pricing information applicable to Horizon and various
valuation methodologies. Where market quotations were not available,
considerable management judgment was involved in the determination of estimated
fair values. Therefore, the estimated fair value of financial instruments shown
below may not be representative of the amounts at which they could be exchanged
in a current or future transaction. Due to the inherent uncertainties of
expected cash flows of financial instruments, the use of alternate valuation
assumptions and methods could have a significant effect on the derived
estimated fair value amounts.
The estimated fair values of financial instruments, as shown below, are
not intended to reflect the estimated liquidation or market value of the
Corporation taken as a whole. The disclosed fair value estimates are limited to
Horizon's significant financial instruments at December 31, 1997 and 1996.
These include financial instruments recognized as assets and liabilities on the
consolidated balance sheet as well as certain off-balance sheet financial
instruments. The estimated fair values shown below do not include any valuation
of assets and liabilities which are not financial instruments as defined by
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments", such as
the value of real property, the value of core deposit intangibles, the value of
mortgage servicing rights, nor the value of anticipated future business.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The carrying amounts
approximate fair value.
INVESTMENT SECURITIES - For debt and marketable equity securities
available for sale and held to maturity, fair values are based on quoted market
prices or dealer quotes. For those securities where a quoted market price is
not available, carrying amount is a reasonable estimate of fair value based
upon comparison with similar securities.
NET LOANS - The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
INTEREST RECEIVABLE/PAYABLE - The carrying amounts approximate fair
value.
DEPOSITS - The fair value of demand deposits, savings accounts,
interest-bearing checking accounts, and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future cash flows using
the rates currently offered for deposits of similar remaining maturity.
28
<PAGE> 30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
- ------------------------------------------------------------------------------
SHORT-TERM BORROWINGS AND OBLIGATION TO ESOP - The carrying amounts
approximate fair value.
FEDERAL HOME LOAN BANK ADVANCES - Rates currently available to the Bank
for debt with similar terms and remaining maturities are used to estimate fair
value of existing advances.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair
value of commitments is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date. Due to the short-term nature of
these agreements, the fair market value is not material.
The estimated fair values of Horizon's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(Thousands)
1997 1997 1996 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 20,358 $ 20,358 $ 20,340 $ 20,340
Short-term investments 219 219 211 211
Investment securities 60,085 60,394 71,851 71,871
Net loans 257,532 256,278 270,075 258,035
Interest receivable 2,264 2,264 2,216 2,216
Financial Liabilities:
Deposits:
Noninterest-bearing $ 61,474 $ 61,474 $ 46,050 $ 46,050
Interest-bearing 202,939 207,986 243,130 246,960
---------- -------- ---------- ----------
Total deposits 264,413 269,460 289,180 293,010
Short-term borrowings 16,000 16,005 12,849 12,824
Federal Home Loan Bank advances 42,000 42,060 41,500 41,503
Interest payable 674 674 590 590
</TABLE>
29
<PAGE> 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
- ---------------------------------------------------------------------------
HELD TO MATURITY
----------------
The amortized cost and estimated fair value of investment securities
available for sale and held to maturity are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1997
U.S. Treasury and U.S. Government agency securities $3,965 $60 $ 0 $4,025
GNMA 6,048 140 6,188
FHLMC 13,126 244 13,370
FNMA 20,811 229 21,040
-------------- --------------- -------------- ------------
Total mortgage-backed securities 39,985 613 0 40,598
-------------- --------------- -------------- ------------
Total debt securities 43,950 673 0 44,623
Equity securities 4,020 (5) 4,015
-------------- --------------- -------------- ------------
Total investment securities available for sale $47,970 $673 $(5) $48,638
============== =============== ============== ============
HELD TO MATURITY AT DECEMBER 31, 1997
U.S. Government agency securities $2,040 $104 $ 0 $2,144
Obligations of state and political subdivisions 9,407 205 9,612
-------------- --------------- -------------- ------------
Total debt securities held to maturity $11,447 $309 $0 $11,756
============== =============== ============== ============
AVAILABLE FOR SALE AT DECEMBER 31, 1996
U.S. Treasury and U.S. Government agency securities $4,965 $103 $ 0 $5,068
Other securities 1,018 (4) 1,014
-------------- --------------- -------------- ------------
Subtotal 5,983 103 (4) 6,082
-------------- --------------- -------------- ------------
GNMA 7,620 148 (18) 7,750
FHLMC 16,719 154 (81) 16,792
FNMA 25,344 56 (115) 25,285
-------------- --------------- -------------- ------------
Total mortgage-backed securities 49,683 358 (214) 49,827
-------------- --------------- -------------- ------------
Total debt securities 55,666 461 (218) 55,909
Equity securities 3,230 (98) 3,132
-------------- --------------- -------------- ------------
Total investment securities available for sale $58,896 $461 $(316) $59,041
============== =============== ============== ============
HELD TO MATURITY AT DECEMBER 31, 1996
U.S. Government agency securities $2,793 $ 0 $ 0 $2,793
Obligations of state and political subdivisions 10,017 75 (47) 10,045
-------------- --------------- -------------- ------------
Total debt securities held to maturity $12,810 $75 $(47) $12,838
============== =============== ============== ============
</TABLE>
30
<PAGE> 32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
HELD TO MATURITY (Continued)
----------------------------
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(Thousands)
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
AVAILABLE FOR SALE:
Due after one year through five years $ 1,715 $ 1,757
Due after five years through ten years 250 250
Due after ten years 2,000 2,018
--------- ---------
Subtotal 3,965 4,025
Mortgage-backed securities 39,985 40,598
--------- ---------
Total debt securities available for sale $ 43,950 $ 44,623
========= =========
HELD TO MATURITY:
Due in one year or less $ 1,291 $ 1,312
Due after one year through five years 2,603 2,636
Due after five years through ten years 5,611 5,825
Due after ten years 1,942 1,983
--------- ---------
Total debt securities held to maturity $ 11,447 $ 11,756
========= =========
</TABLE>
Gross gains and losses realized on sales of investment securities
available for sale were $9,000 and $0 for 1997, $0 for 1996 and $62,000 and
$16,000 for 1995.
At December 31, 1997 and 1996, there were no holdings of securities of
any one issuer, other than the U.S. Government and its agencies and
corporations, in an amount greater than 10% of stockholders' equity.
Investment securities and investment securities available for sale with an
amortized cost of $16,806,000 and $19,836,000 as of December 31, 1997 and 1996,
respectively, were pledged to secure public and trust deposits and Federal Home
Loan Bank advances.
NOTE 4 - LOANS
- --------------
Loans as presented in the consolidated balance sheets are comprised of the
following classifications:
<TABLE>
<CAPTION>
(Thousands)
1997 1996
---- ----
<S> <C> <C>
Commercial loans $73,177 $75,460
Real estate mortgages 120,345 133,739
Installment loans 64,593 62,277
------ ------
Total loans $258,115 $271,476
======== ========
</TABLE>
Loans to directors and executive officers of Horizon and Bank,
including associates of such persons, amounted to $3,538,000 and $4,188,000, as
of December 31, 1997 and 1996, respectively. During 1997 new loans or advances
were $1,232,000 and loan payments were $1,885,000.
31
<PAGE> 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
- ----------------------------------
<TABLE>
<CAPTION>
(thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,435 $2,777 $2,555
Provision charged to expense 1,325 66
Recoveries credited to the allowance 383 149 515
Losses charged to the allowance (1,441) (557) (293)
------- ----- -----
Balance at end of year $2,702 $2,435 $2,777
====== ====== ======
</TABLE>
At December 31, 1997 and 1996, loans past due more than 90 days and still
accruing interest approximated $862,000 and $682,000, respectively.
Loans on which the recognition of interest has been discontinued or
reduced totaled $319,000, $316,000 and $668,000 at December 31, 1997, 1996 and
1995, respectively. Interest income not recognized on these loans totaled
approximately $32,000, $36,000, and $55,000 in 1997, 1996 and 1995,
respectively.
NOTE 6 - ALLOWANCE FOR OTHER REAL ESTATE OWNED
- ----------------------------------------------
The following is an analysis of the activity in the allowance for other
real estate owned included in other assets:
<TABLE>
<CAPTION>
(Thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of $151 $1,075 $1,801
Loss on other real estate owned charged to expense 48
Sale of other real estate owned (151) (924)
Losses charged to the allowance (774)
----- ----- ------
Balance at end of year $0 $151 $1,075
===== ====== ======
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT-NET
- -----------------------------------
Premises and equipment are stated at cost, less accumulated depreciation
and consist of the following as of December 31:
<TABLE>
<CAPTION>
(Thousands)
1997 1996
---- ----
<S> <C> <C>
Land $2,838 $2,504
Building and improvements 12,689 12,757
Furniture and equipment 8,878 6,288
----- -----
Total 24,405 21,549
Accumulated depreciation (8,261) (7,496)
------- -------
Premises and equipment, net $16,144 $14,053
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totaled $1,370,000, $1,040,000 and $892,000, respectively.
32
<PAGE> 34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - LEASES
- ---------------
Bank has leases for premises and equipment which expire at various dates
through 2001. Many have renewal options. Bank pays taxes, insurance and
maintenance costs on the leases. Rental expense related to these leases for the
years ended December 31, 1997, 1996 and 1995 amounted to $291,000, $317,000 and
$197,000, respectively.
The future minimum commitments as of December 31, 1997, for all
noncancelable operating leases, follows:
<TABLE>
<CAPTION>
Year ending
December 31 (thousands)
----------- -----------
<S> <C>
1998 $229
1999 191
2000 108
2001 38
2002 1
----
Total $567
====
</TABLE>
NOTE 9 - DEPOSITS
- -----------------
The components of the deposit categories are as follows at December 31:
<TABLE>
<CAPTION>
(Thousands) 1997 1996
---- ----
DEMAND
<S> <C> <C>
Noninterest-bearing $61,474 $46,050
Interest-bearing (NOW) 16,605 48,172
------ ------
Total demand deposits 78,079 94,222
SAVINGS
Fixed rate 48,714 55,843
Money market (variable rate) 5,817 8,876
----- -----
Total savings deposits 54,531 64,719
TIME
Certificates of deposit of $100,000 or more 19,558 28,158
Other time deposits 112,245 102,081
------- -------
Total time deposits 131,803 130,239
------- -------
Total deposits $264,413 $289,180
======== ========
</TABLE>
Interest expense on time certificates of $100,000 or more was
approximately $2,591,000, $2,001,000 and $1,713,000 for 1997, 1996 and 1995,
respectively.
33
<PAGE> 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - DEPOSITS (Continued)
- -----------------
Certificates of deposit of $100,000 or more by remaining maturity as of
December 31 are as follows:
<TABLE>
<CAPTION>
(Thousands)
1997 1996
---- ----
<S> <C> <C>
Due in three months or less $6,652 $14,311
Due after three months through six months 2,943 5,059
Due after six months through one year 2,429 3,261
Due after one year 7,534 5,527
----- -----
Total certificates of deposit of $100,000 or more $19,558 $28,158
======= =======
</TABLE>
NOTE 10 - BORROWED FUNDS
- ------------------------
Included in short-term borrowings were $1,000,000 of financing to Loan
Store from an unrelated financial institution and $15,000,000 of Federal Funds
purchased at December 31, 1997. At December 31, 1996, short-term borrowings
included $11,562,000 of securities sold under agreements to repurchase and
$1,200,000 of Federal Funds purchased. These short-term borrowings mature
within one year. In addition to these borrowings, at December 31, 1997 Bank has
available approximately $27,500,000 in credit lines with various money center
banks.
Federal Home Loan Bank Advances at December 31, 1997 by contractual
maturity are as follows:
<TABLE>
(Thousands)
<S> <C>
FHLB Advance, 5.74%, Due May 7, 1998 $5,000
FHLB Advance, 6.21%, Due August 3, 1998 5,000
FHLB Advance, 5.31%, Due October 1, 1998 3,000
FHLB Advance, 5.90%, Due December 17, 1998 3,000
FHLB Advance, 5.63%, Due January 19, 1999 6,000
FHLB Advance, variable, Due October 12, 1999 10,000
FHLB Advance, variable, Due January 3, 2000 10,000
-------
$42,000
=======
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and all mortgage related assets.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN
- ---------------------------------------------------------
Horizon maintains an employee stock ownership plan (ESOP) as a retirement
plan that currently covers substantially all employees. The ESOP is
noncontributory and each eligible employee is vested according to a schedule
based upon years of service.
The ESOP borrowed $3,400,000 in 1985 for the purpose of purchasing
137,259 shares of Horizon common stock at $26.85 per share from former Board
members and their families. Under terms of the loan agreement, unallocated
shares held with the Bank, as ESOP trustee, were pledged as collateral. Horizon
also guaranteed the loan, and was obligated to contribute sufficient cash to
the ESOP to repay the loan principal and interest. As additional collateral,
Horizon pledged 51% of the issued and outstanding stock of Bank. The first
payment on the loan was made in October 1985, and the last scheduled payment
was paid in 1995.
34
<PAGE> 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN (Continued)
- ---------------------------------------------------------
In early 1993, the Compensation Committee of the Board initially
discussed the continuation of Horizon's employee retirement benefit program
which is maintained as an Employee Stock Ownership Plan. In August 1993, the
Board of Directors approved the continuation of this plan and authorized the
transfer of 172,414 shares of the Company's stock into the Employee Stock
Ownership Plan for future allocation to employee retirement accounts. Upon
approval by all the required regulatory agencies, Horizon issued $5,000,006 in
stock on August 26, 1994 at a price of $29 per share, the market value of the
stock at the time the transaction was approved. Under Federal regulation, the
Employee Stock Ownership Trust may pay a value equal to or less than market
value for acquired shares, but not more. Under Statement of Position (SOP) 93-6
"Employers Accounting for Employees Stock Ownership Plans" issued by the
Accounting Standards Division of the American Institute of Certified Public
Accountants, these shares are not included in outstanding shares for the
purposes of computing earnings per share and book value per share until they
are committed-to-be-released for allocation to employee retirement accounts.
The provisions of SOP 93-6 were adopted in conjunction with the
continuation of the ESOP and affected ESOP expense beginning January 1, 1995.
Below are the transactions affecting ESOP expense and cash contributions to the
ESOP in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividends paid on unallocated ESOP shares $340 $255 $207
Market value increase of shares released 184 244 172
Other contributions 86 213
---- ---- ----
Total ESOP expense included in salaries and benefits $524 $585 $592
==== ==== ====
Total cash contributions made to ESOP during the year $0 $86 $207
== === ====
</TABLE>
As of December 31, 1997, Horizon had seven loans outstanding with the
ESOP with remaining balances totaling $6,420,000. These loans were utilized to
repurchase Horizon common shares from retiring employees, eligible employees
electing to diversify portions of their ESOP accounts and other shareholders.
Collateral for these loans is 217,175 shares of Horizon common stock. These
loans do not bear any interest and mature within 15 to 20 years.
35
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN - RETIREMENT PLAN (Continued)
- ---------------------------------------------------------
Below are the transactions affecting the ESOP equity accounts:
<TABLE>
<CAPTION>
Common Additional Unallocated Obligation
(in thousands) Stock Paid-in Capital ESOP Shares to ESOP Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $295 $8,055 $(5,000) $(298) $3,052
-------------------------------------------------------------------------------------------------------------------------------
Final ESOP obligation payment (1985 plan) 298 298
Market value increase in ESOP shares released 172 172
Loan repayments 500 500
Tax benefit of ESOP dividend deduction 50 50
Loan to fund ESOP share repurchases (254) (254)
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $295 $8,277 $(4,754) $0 $3,818
------------------------------------------------------------------------------------------------------------------------------
Market value increase in ESOP shares released 244 244
Loan repayments 513 513
Net ESOP share purchases and distributions 24 1,186 1,210
Loans to fund ESOP share repurchases (1,574) (1,574)
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $319 $9,707 $(5,815) $0 $4,211
-------------------------------------------------------------------------------------------------------------------------------
Market value increase in ESOP shares released 184 184
Loan repayments 250 250
Net ESOP share purchases and distributions (12) 270 258
Loans to fund ESOP share repurchases (855) (855)
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $307 $10,161 $(6,420) $0 $4,048
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12 - EMPLOYEE BENEFIT PLAN
- -------------------------------
The Employee Thrift Plan (Plan) provides that all employees of Bank with
the requisite hours of service are eligible for the Plan. Bank fully matches
the first 2% and 50% of the subsequent 4% of individual employee contributions.
Employee voluntary contributions are vested at all times and Bank contributions
are fully vested after six years. Bank's 1997, 1996 and 1995 expense and
contributions related to the thrift plan totaled $189,000, $203,000 and
$172,000, respectively.
36
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - OTHER EXPENSES
- ------------------------
The following is an analysis of other expenses for the year ended
December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplies and printing $504 $309 $379
Advertising 762 489 414
Communication 606 492 444
Professional fees 508 516 486
Deposit insurance 95 8 340
Training 278 251 320
Outside services and consultants 796 642 625
Insurance Company 201 226 176
Other 1,481 1,763 1,293
----- ----- -----
Total other expenses $5,231 $4,696 $4,477
====== ====== ======
</TABLE>
NOTE 14 - INCOME TAXES
- ----------------------
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense
Federal $402 $886 $716
State 211 356 288
Income tax refunds (954)
----- ------ ----
Total 613 1,242 50
Deferred tax provision/(benefit) (29) 357 117
---- ------ ----
Total provision for income taxes $584 $1,599 $167
</TABLE>
In 1993, Horizon filed several amended tax returns to obtain refunds for
federal and state taxes paid in prior periods. The original returns were filed
dating back to 1985. A refund was received in 1995 of $954,000 plus $298,000 of
interest.
37
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - INCOME TAXES (Continued)
- ----------------------
Temporary differences between the amounts reported in the financial
statements and the tax basis of assets and liabilities at December 31, 1997 and
1996, were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
---- ----
<S> <C> <C>
Gross deferred tax assets:
Allowance for losses on loans and other real estate $140 $68
Accrued operating expenses 91 100
Deferred loan fees 139 163
Other 558 561
--- ---
Total deferred tax assets 928 892
Gross deferred tax liabilities:
Depreciation (61) (55)
Discount accretion (4) (3)
--- ---
Total deferred tax liabilities (65) (58)
Net deferred tax assets $863 $834
==== ====
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the statutory Federal income tax rate of 34% to income
before taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax at the statutory Federal income tax rate $784 $1,843 $1,090
Add/(subtract) tax effect of:
Tax-exempt income (271) (300) (334)
Nondeductible expenses and other (110) (285) 175
Federal and state tax refunds (954)
State tax, net of federal effect 181 341 190
--- --- ---
Total provision for income taxes $584 $1,599 $167
==== ====== ====
</TABLE>
Not included in the above tables, but directly impacting changes in
stockholders' equity was the effects of unrealized gains/(losses) on securities
of $268,000 and $60,000 in 1997 and 1996.
38
<PAGE> 40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - REGULATORY MATTERS
- ----------------------------
Horizon and Bank are subject to regulatory capital requirements administered by
federal and banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Tier 1 capital
--------------- --------------
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year end, consolidated actual capital levels (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
1997 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $ 35.0 12.5% $ 22.3 8.0% $ 27.9 10.0%
Bank $ 33.0 14.2% $ 18.6 8.0% $ 23.2 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 32.3 11.6% $ 11.2 4.0% $ 16.7 6.0%
Bank $ 30.3 13.1% $ 9.3 4.0% $ 13.9 6.0%
Tier 1 capital (to average assets)
Consolidated $ 32.3 8.8% $ 14.7 4.0% $ 18.4 5.0%
Bank $ 30.3 8.3% $ 14.5 4.0% $ 18.2 5.0%
1996
Total capital (to risk weighted assets)
Consolidated $ 35.8 13.6% $ 22.4 8.0% $ 28.0 10.0%
Bank $ 32.7 13.5% $ 19.4 8.0% $ 24.3 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 33.3 12.7% $ 11.2 4.0% $ 16.8 6.0%
Bank $ 30.3 12.5% $ 9.7 4.0% $ 14.6 6.0%
Tier 1 capital (to average assets)
Consolidated $ 33.3 8.2% $ 16.3 4.0% $ 20.4 5.0%
Bank $ 30.3 8.2% $ 14.6 4.0% $ 18.6 5.0%
</TABLE>
39
<PAGE> 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
- ---------------------------------------------
Presented below are condensed financial statements for the parent
company, Horizon Bancorp as of and for the years ended December 31:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (Thousands)
- ------------------------- 1997 1996
---- ----
<S> <C> <C>
ASSETS
Total cash and cash equivalents $864 $712
Investment in Bank 30,716 30,473
Investment in Insurance Company 226 172
Investment in The Loan Store 657 433
Investment securities, net 401 1,404
Accrued interest receivable 0 20
Dividends receivable from Bank 500 1,000
Other assets 1,843 1,902
----- -----
Total assets $35,207 $36,116
======= =======
LIABILITIES
Other liabilities $2,450 $2,608
------ ------
Total liabilities 2,450 2,608
Equity receivable from contributions and dividends to ESOP 4,048 4,211
STOCKHOLDER'S EQUITY 28,709 29,297
------ ------
Total liabilities and stockholder's equity $35,207 $36,116
======= =======
<CAPTION>
CONDENSED STATEMENTS OF INCOME (Thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING INCOME/(EXPENSE)
Dividend income from Bank $3,000 $3,600 $1,600
Investment income 139 123 92
Interest on federal and state income tax refunds 298
Other income 21 23 33
Interest expense (20)
Employee benefits expense (1,183) (1,399) (993)
Other expense (155) (238) (143)
----- ----- -----
INCOME BEFORE DISTRIBUTED INCOME OF SUBSIDIARIES 1,822 2,109 867
UNDISTRIBUTED INCOME OF SUBSIDIARIES (236) 1,049 987
----- ----- ---
INCOME BEFORE TAX 1,586 3,158 1,854
BENEFIT FOR INCOME TAX 135 666 1,185
--- --- -----
NET INCOME $1,721 $3,824 $3,039
====== ====== ======
</TABLE>
40
<PAGE> 42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
- ---------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
(in thousands) 1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $1,721 $3,824 $3,039
Adjustments to reconcile net income to net cash
from operating activities
Undistributed (income)/loss of Bank 15 (1,125) (990)
Undistributed (income)/loss of Insurance Company (54) 11
Undistributed loss of Loan Store 276 65
Additional paid in capital from release of ESOP shares 184 244 172
Gain on sale of securities (10)
Accretion (82) (12)
Change in income taxes receivable (385) (387) (173)
Change in interest receivable 20 (4) (9)
Change in dividends receivable from Bank 500 (600)
Change in other assets 62 (1,343) 130
Change in other liabilities (158) 751 614
----- --- ---
Net cash from operating activities 2,089 1,424 2,783
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investment securities 1,000
Principal repayments of investment securities 26
Purchase of investment securities (1,006)
----- ----- -------
Net cash from investing activities 1,000 26 (1,006)
----- -- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment in Insurance Company (47)
Investment in Loan Store (500) (500)
Dividends paid (1,264) (1,031) (895)
Issuance of common shares 0
Purchase of treasury stock (1,173) (368) (745)
------- ----- -----
Net cash from financing activities (2,937) (1,399) (2,187)
------- ------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 152 51 (410)
--- -- -----
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 712 661 1,071
--- --- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $864 $712 $661
==== ==== ====
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest $0 $0 $20
Income taxes $0 $0 $(954)
</TABLE>
41
<PAGE> 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - STOCK OPTIONS
- -----------------------
Horizon maintains a Nonqualified Stock Option and Stock Appreciation
Rights Plan (Plan) under which options and stock appreciation rights (SARs) may
be granted to certain officers and employees. SARs entitle eligible employees
to receive cash, stock or a combination of cash and stock totaling the excess,
on the date of exercise, of the fair market value of the shares of common stock
covered by the option over the option exercise price. The underlying stock
options are deemed to have been exercised upon exercise of the SARs. No options
remain available for grant at December 31, 1997 and 1996, however, outstanding
options may be exercised on a cumulative percentage basis until their
expiration.
Horizon recognizes compensation expense related to the plan on a periodic
basis based on the difference between the excess, of the fair market value of
the shares of common stock over the exercise price for SARs and those options
exercised during the year. Horizon's expense related to the Plan was $677,000
for 1997, $814,000 for 1996, and $400,000 for 1995.
A summary of transactions for the plan follows:
<TABLE>
<CAPTION>
-------------Shares----------
Available Options
For Grant Outstanding Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
Balance: December 31, 1990 10,000 75,000 $22.50 - $31.50
Granted (Expire January 27, 2001) (10,000) 10,000 $13.50
Forfeitures 500 (500) $13.50 - $31.50
------- ------- ---------------
Balance: December 31, 1991 500 84,500 $13.50 - $31.50
Forfeitures 600 (600) $13.50
Expirations (1,100)
------- ------- ---------------
Balance: December 31, 1992 0 83,900 $13.50 - $31.50
=======
Exercised (900) $28.00
Balance: December 31, 1993 83,000 $13.50 - $31.50
------- ---------------
Balance: December 31, 1994 83,000 $13.50 - $31.50
Exercised (250) $34.75
------- ---------------
Balance: December 31, 1995 82,750 $13.50 - $31.50
Exercised (3,000) $41.25
------- ---------------
Balance: December 31, 1996 79,750 $13.50 - $31.50
Exercised (27,950) $47.00 - $59.50
------- ---------------
Balance: December 31, 1997 51,800 $13.50 - $31.50
======= ===============
</TABLE>
42
<PAGE> 44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
- ---------------------------------------------------------------
Because of the nature of its activities, Horizon is subject to pending and
threatened legal actions that arise in the normal course of business. In
management's opinion, after consultation with counsel, none of the litigation
to which Horizon or any of its subsidiaries is a party will have a material
effect on the consolidated financial position or results of operations of
Horizon.
Bank was required to have approximately $3,445,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and clearing
balance requirements at December 31, 1997. These balances are included in cash
and cash equivalents and do not earn interest.
Bank is a party to financial instruments with off-balance sheet risk in
the ordinary course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans and standby letters of
credit. Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans and
standby letters of credit is represented by the contractual amount of those
instruments. Bank follows the same credit policy to make such commitments as is
followed for those loans recorded in the financial statements.
As of December 31, 1997, commitments to make loans amounted to
approximately $45,026,000 and commitments under outstanding standby letters of
credit amounted to approximately $1,065,000. Since many commitments to make
loans and standby letters of credit expire without being used, the amount does
not necessarily represent future cash advances. No losses are anticipated as a
result of these transactions. Collateral obtained upon exercise of the
commitment is determined using management's credit evaluation of the borrower
and may include real estate, vehicles, business assets, deposits and other
items.
43
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Horizon Bancorp:
We have audited the accompanying consolidated balance sheets of HORIZON
BANCORP (an Indiana Corporation) and subsidiaries as of December 31, 1997, and
1996 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HORIZON BANCORP and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 25, 1998
44
<PAGE> 46
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the
financial statements and related notes on the preceding pages. The statements
have been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on
management's best estimates and judgments. Financial information elsewhere in
the Annual Report is consistent with that in the financial statements.
In meeting its responsibility for the accuracy of the financial
statements, management relies on the Company's system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are properly recorded to permit the
preparation of appropriate financial information. The system of internal
controls is supplemented by a program of internal audits to independently
evaluate the adequacy and application of financial and operating controls and
compliance with Company policies and procedures.
The Audit Committee of the Board of Directors meets periodically with
management, the independent accountants and the internal auditors to ensure
that each is properly discharging its responsibilities with regard to the
financial statements and internal accounting controls. The independent
accountants have full and free access to the Audit Committee and meet with it
to discuss auditing and financial reporting matters.
The financial statements in the Annual Report have been audited by Arthur
Andersen LLP, independent public accountants, for 1997, 1996, and 1995. Their
audits were conducted in accordance with generally accepted auditing standards
and included a consideration of internal accounting controls, tests of
accounting records and other audit procedures to the extent necessary to allow
them to express their opinion on the fairness of the financial statements in
conformity with generally accepted accounting principles.
45
<PAGE> 47
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS (thousands)
Total interest income $29,265 $28,233 $26,262 $24,179 $25,130
Total interest expense 12,937 11,800 11,112 9,356 9,751
Net interest income 16,328 16,433 15,150 14,823 15,379
Provision for loan losses 1,325 66 165 276
Total noninterest income 4,991 5,750 3,987 4,068 3,771
Total noninterest expense 17,689 16,694 15,931 14,609 14,106
Provision for income taxes 584 1,599 167 1,449 1,665
Net income 1,721 3,824 3,039 2,668 3,103
Cash dividend declared 1,264 1,031 895 919 923
PER SHARE DATA
Net income $2.42 $5.19 $4.05 $3.48 $4.02
Cash dividends declared 1.80 1.40 1.20 1.20 1.20
Book value at period end 46.79 46.40 43.18 36.00 36.13
Weighted average share outstanding 710,967 736,887 750,286 767,419 772,525
PERIOD END TOTALS (thousands)
Loans, net of deferred loan fees and unearned income $258,115 $271,476 $241,662 $223,622 $219,139
Allowance for loan losses 2,702 2,435 2,777 2,555 2,310
Total assets 359,751 382,038 368,013 369,470 364,001
Total deposits 264,413 289,180 288,984 295,784 306,135
Long-term debt 42,000 41,500 21,400 15,400 16,600
RATIOS
Loan to deposit 97.62% 93.88% 83.62% 75.59% 71.58%
Loan to total funding 80.06 79.03 72.80 65.98 66.32
Return on average assets 0.46 1.04 0.86 0.75 0.88
Average stockholders' equity to average total assets 9.09 8.91 8.53 8.01 7.58
Return on average stockholders' equity 5.06 11.67 10.09 9.41 11.61
Dividend payout ratio (dividends divided by net income) 73.45 26.96 29.45 34.45 29.75
</TABLE>
46
<PAGE> 48
MARKET FOR HORIZON'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS
Horizon common stock is traded on the over-the-counter market. ABN AMRO is the
principal broker in Horizon stock. The following table sets forth, for the
periods indicated, the high and low bid prices per share as reported by ABN
AMRO. The bid prices represent dealer prices and, do not include retail
mark-up, mark-down or commissions and may not represent actual transactions.
Also summarized below are the cash dividends declared by quarter for 1997 and
1996.
<TABLE>
<CAPTION>
Common Stock Dividends
Bid Prices Declared
1996 High Low Per Share
---- ---- --- ---------
<S> <C> <C> <C>
First Quarter $41.00 $35.63 $.35
Second Quarter 42.00 38.00 .35
Third Quarter 44.00 41.00 .35
Fourth Quarter 47.00 42.63 .35
1997
----
First Quarter $48.75 $45.50 $.45
Second Quarter 53.50 48.75 .45
Third Quarter 55.50 53.50 .45
Fourth Quarter 58.75 55.50 .45
</TABLE>
There can be no assurance as to the amount of future dividends on Horizon common
stock since future dividends are subject to the discretion of the Board of
Directors, cash needs, general business conditions and dividends from the bank
subsidiary.
The approximate number of holders of outstanding common stock, based upon the
number of record holders, as of December 31, 1997 is 707.
FORM 10-K
Horizon will provide without charge to each stockholder upon written request to
Diana E. Taylor, Chief Financial Officer, Horizon Bancorp, 515 Franklin Square,
Michigan City, Indiana 46360, a copy of the Company's Annual Report on Form
10-K, including the Financial Statements and schedules thereto required to be
filed with the Securities and Exchange Commission for the Company's most recent
fiscal year.
47
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of Name Under Which
Subsidiary Incorporation Business is Done
- ---------- ------------- ----------------
<S> <C> <C>
Horizon Bank, National Association Indiana Horizon Bank
IMS Investment Management,
National Association Indiana IMS Investment Management
(a subsidiary of Horizon Bank)
HBC Insurance Company, Inc. Arizona HBC Insurance Company
The Loan Store, Inc. Indiana The Loan Store
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,506
<INT-BEARING-DEPOSITS> 219
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,638
<INVESTMENTS-CARRYING> 11,447
<INVESTMENTS-MARKET> 11,756
<LOANS> 258,115
<ALLOWANCE> 2,702
<TOTAL-ASSETS> 359,751
<DEPOSITS> 264,413
<SHORT-TERM> 16,000
<LIABILITIES-OTHER> 3,907
<LONG-TERM> 42,000
0
0
<COMMON> 720
<OTHER-SE> 27,989
<TOTAL-LIABILITIES-AND-EQUITY> 359,751
<INTEREST-LOAN> 24,574
<INTEREST-INVEST> 4,691
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,265
<INTEREST-DEPOSIT> 10,343
<INTEREST-EXPENSE> 12,937
<INTEREST-INCOME-NET> 16,328
<LOAN-LOSSES> 1,325
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,689
<INCOME-PRETAX> 2,305
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,721
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.42
<YIELD-ACTUAL> 4.79
<LOANS-NON> 319
<LOANS-PAST> 862
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 44
<ALLOWANCE-OPEN> 2,435
<CHARGE-OFFS> 1,441
<RECOVERIES> 383
<ALLOWANCE-CLOSE> 2,702
<ALLOWANCE-DOMESTIC> 2,702
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 565
</TABLE>
