SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): September 14, 1998
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia 0-17733 55-0619957
(State or other jurisdiction (Commission File No.) I.R.S. Employer
of incorporation) (Identification No.)
25 Gatewater Road
P.O. Box 7520
Charleston, West Virginia 25313
(Address of principal executive offices)
(304) 769-1102
(Registrant's telephone number, including area code)
N/A
(former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
As previously reported by City Holding Company ("City Holding") in its
Quarterly Report on Form 10-Q, dated June 30, 1998, City Holding entered into an
Agreement and Plan of Reorganization (the "Agreement") with Horizon Bancorp,
Inc. ("Horizon") on August 7, 1998, which provides, among other things, for the
acquisition of Horizon by City Holding.
In connection with the Agreement, attached hereto as exhibits are (i)
certain unaudited consolidated financial information of Horizon, including the
consolidated balance sheet of Horizon as of June 30, 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three months and the six months ended June 30, 1998 and the
related notes thereto (the "Unaudited Financial Statements"); (ii) Management's
Discussion and Analysis of Financial Condition and Results of Operations as
included in Horizon's Form 10-Q for the quarter ended June 30, 1998; (iii)
certain audited consolidated financial information of Horizon, including the
consolidated balance sheets of Horizon as of December 31, 1997 and 1996, the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997,
1996 and 1995 and the related notes thereto and report of independent auditors
thereon (the "Audited Financial Statements"); and (iv) Management's Discussion
and Analysis of Financial Condition and Results of Operations as incorporated by
reference in Horizon's Annual Report on Form 10-K for the year ended December
31, 1998.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Current Report on Form 8-K (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of Horizon on a consolidated basis,
including statements preceded by, followed by or that include the words
"believes", "expects", "anticipates", "estimates" or similar expressions. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(a) competitive pressures among depository and other financial institutions may
increase significantly; (b) changes in the interest rate environment may reduce
margins; (c) general economic or business conditions, either nationally or in
the states in which Horizon is doing business, may be less favorable than
expected resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit; (d) legislative or regulatory changes may adversely
affect the business in which Horizon is engaged; and (e) changes may occur in
the securities markets. The forward-looking information is included pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and City Holding disclaims any intent or obligation to update this
forward-looking information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
(23)(a) Consent of Ernst & Young LLP
(23)(b) Consent of Diamond, Leftwich, Goheen &
Dunn
(99)(a) Horizon Unaudited Financial Statements as
of June 30, 1998
(99)(b) Horizon Management's Discussion and
Analysis of Financial Condition and
Results of Operations for the Period Ended
June 30, 1998
(99)(c) Horizon Audited Financial Statements as of
December 31, 1997
(99)(d) Horizon Management's Discussion and
Analysis of Financial Condition and
Results of Operations for the Period Ended
December 31, 1997
(99)(e) Independent Auditors' Report of Ernst &
Young LLP
(99)(f) Independent Auditors' Report of Diamond,
Leftwich, Goheen & Dunn
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY HOLDING COMPANY
September 14, 1998 /s/ Michael D. Dean
-----------------------------
Michael D. Dean
Senior Vice President-Finance
EXHIBIT (23)(a)
Consent of Independent Auditors
We consent to the inclusion in City Holding Company's Report on Form 8-K filed
on September 14, 1998 of our report dated February 13, 1998, with respect to the
consolidated financial statements of Horizon Bancorp, Inc. incorporated by
reference in its Annual Report (Form 10-K) for the year ended December 31, 1997,
filed with the Securities and Exchange Commission.
Charleston, West Virginia /s/ Ernst & Young LLP
September 14, 1998
EXHIBIT (23)(b)
Consent of Independent Auditors
We consent to the use of our report dated February 12, 1996, with respect to the
consolidated financial statements of Twentieth Bancorp, Inc. and Subsidiary for
the year ended December 31, 1995, by City Holding Company in filing Form 8-K
which will include the consolidated financial statements of Horizon as of the
year ended December 31, 1997. Form 8-K is expected to be filed with the
Securities and Exchange Comission on or about September 14, 1998
/s/ DIAMOND, LEFTWICH, GOHEEN & DUNN
Huntington, West Virginia
September 14, 1998
EXHIBIT 99.A
- - -----------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - -----------------------------------------------------------------------------
HORIZON BANCORP, INC.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,721 $ 31,262
Federal funds sold 12,265 14,035
----------- -----------
Cash and cash equivalents 37,986 45,297
Investment securities:
Available-for-sale, at fair value 168,593 173,864
Held-to-maturity, at cost (approximate fair value of $41,572
at June 30, 1998, and $42,771 at December 31, 1997) 40,430 41,554
Loans:
Total loans 759,916 728,239
Less: Allowance for loan losses (9,784) (10,517)
----------- -----------
Net loans 750,132 717,722
Premises and equipment, net 16,732 17,123
Accrued interest receivable and other assets 26,634 24,721
----------- -----------
Total assets $ 1,040,507 $ 1,020,281
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing 120,301 $ 113,415
Interest bearing 741,205 727,892
----------- -----------
Total deposits 861,506 841,307
Short-term borrowings 43,704 42,642
Long-term borrowings 5,972 7,102
Accrued interest payable and other liabilities 13,413 15,208
----------- -----------
Total liabilities 924,595 906,259
Shareholders' equity:
Common stock, $1 par value; 20,000 shares authorized;
9,312 shares issued, including 177 shares in treasury at
June 30, 1998 and 9,310 shares issued, including 106
shares in treasury at December 31, 1997 9,312 9,310
Capital surplus 19,814 19,784
Retained earnings 90,616 86,768
Treasury stock, at cost (5,052) (2,938)
Accumulated other comprehensive income 1,222 1,098
----------- -----------
Total shareholders' equity 115,912 114,022
----------- -----------
Total liabilities and shareholders' equity $ 1,040,507 $ 1,020,281
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
- - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- - ------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $17,402 $15,046 $ 33,936 $ 29,525
Interest and dividends on investment securities:
Taxable 2,316 2,796 4,804 5,696
Tax-exempt 790 835 1,581 1,615
Federal funds sold and other 376 38 707 114
------- ------- -------- --------
Total interest income 20,884 18,715 41,028 36,950
Interest expense:
Deposits 8,636 7,227 16,885 14,248
Short-term borrowings 440 192 1,086 477
------- ------- -------- --------
Total interest expense 9,076 7,419 17,971 14,725
------- ------- -------- --------
Net interest income 11,808 11,296 23,057 22,225
Provision for loan losses 557 400 1,266 1,100
------- ------- -------- --------
Net interest income after provision for loan losses 11,251 10,896 21,791 21,125
Other income:
Service charges and fees 1,137 984 2,149 1,864
Investment securities gains (losses) 3 2 (22) (36)
Other 546 441 1,212 934
------- ------- -------- --------
Total other income 1,686 1,427 3,339 2,762
Other expenses:
Salaries and employee benefits 3,227 3,114 6,470 6,304
Net occupancy expense 398 471 853 925
Equipment expense 752 594 1,364 1,128
Outside data processing 596 476 1,125 1,051
Advertising 82 141 162 294
Other 2,255 2,125 3,992 3,751
------- ------- -------- --------
Total other expenses 7,310 6,921 13,966 13,453
------- ------- -------- --------
Income before income taxes 5,627 5,402 11,164 10,434
Applicable income taxes 1,927 1,890 3,840 3,680
------- ------- -------- --------
Net income $ 3,700 $ 3,512 $ 7,324 $ 6,754
======= ======= ======== ========
Earnings per common share:
Basic $ 0.41 $ 0.38 $ 0.80 $ 0.73
======= ======= ======== ========
Diluted $ 0.40 $ 0.38 $ 0.80 $ 0.73
======= ======= ======== ========
Average common shares outstanding:
Basic 9,136 9,271 9,155 9,283
======= ======= ======== ========
Diluted 9,188 9,294 9,204 9,301
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
- - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- - ------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE
STOCK SURPLUS EARNINGS STOCK INCOME TOTAL
------ ------- -------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 9,310 $19,784 $ 86,768 $(2,938) $1,098 $ 114,022
Comprehensive income:
Net income - - 7,324 - - 7,324
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities, net of reclassification adjustment - - - - 124 124
---------
Comprehensive income 7,448
Cash dividends ($0.19 per share) - - (3,477) - - (3,477)
Purchase of treasury shares - - - (2,114) - (2,114)
Exercise of stock options 2 30 - - - 32
------- ------- -------- ------- ------ ---------
Balances at June 30, 1998 $ 9,312 $19,814 $ 90,615 $(5,052) $1,222 $ 115,911
======= ======= ======== ======= ====== =========
Disclosure of reclassification amount:
Unrealized holding gains on available-for-sale
securities arising during the period $ 110
Less: reclassification adjustment for losses
realized in net income (14)
Net unrealized losses on available-for-sale -----
securities, net of tax $ 124
=====
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
- - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - ------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,324 $ 6,754
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization 1,287 934
Provision for loan losses 1,266 1,100
Loss on sale of investment securities 22 36
Loss on sale of assets 43 -
Change in accrued interest receivable and other assets (2,300) (2,343)
Change in accrued interest payable and other liabilities (1,880) 2,427
-------- --------
Net cash provided by operating activities 5,762 8,908
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities 5,473 16,480
Proceeds from maturities of available-for-sale securities 36,284 11,744
Purchases of available-for-sale securities (37,250) (6,278)
Proceeds from maturities of held-to-maturity securities 2,070 390
Net increase in loans (33,676) (31,135)
Purchases of premises and equipment (546) (898)
-------- --------
Net cash used in investing activities (27,645) (9,697)
FINANCING ACTIVITIES
Net increase in deposits 20,199 3,359
Net decrease in long-term borrowings (1,130) -
Net increase (decrease) in short-term borrowings 1,062 (495)
Cash dividends paid (3,477) (3,156)
Purchase of treasury shares (2,114) (919)
Exercise of stock options 32 12
-------- --------
Net cash provided by (used in) financing activities 14,572 (1,199)
Net decrease in cash and cash equivalents (7,311) (1,988)
Cash and cash equivalents at beginning of period 45,297 38,958
-------- --------
Cash and cash equivalents at end of period $ 37,986 $ 36,970
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
- - ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------
HORIZON BANCORP, INC.
JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - ------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- - ------------------------------------------------------------------------------
The accompanying unaudited interim consolidated financial statements have
been prepared by Horizon Bancorp, Inc. ("Horizon"), in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation
have been included. The results of operations for the six month period
ended June 30, 1998, are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
These financial statements should be read in conjunction with the financial
statements and notes included in the 1997 Annual Report and Form 10-K of
Horizon Bancorp, Inc.
- - ------------------------------------------------------------------------------
NOTE 2. MERGERS AND ACQUISITIONS
- - ------------------------------------------------------------------------------
On August 7, 1998, Horizon Bancorp, Inc., a West Virginia corporation
("Horizon"), entered into an Agreement and Plan of Reorganization with City
Holding Company, a West Virginia corporation ("City Holding"), for a
tax-free merger of the two companies under which each outstanding share of
common stock, par value $1.00 per share, of Horizon ("Horizon Common
Stock") would be converted into the number of shares of common stock, par
value $2.50 per share, of City Holding ("City Holding Common Stock"). Under
the agreement, the exchange ratio is determined by dividing $45.00 per
share of Horizon Common Stock (the "Common Stock Price Per Share") by the
average closing price of the City Holding Common Stock as reported on the
Nasdaq National Market for each of the 10 trading days ending on the 10th
day prior to the day of the effective time of the merger between Horizon
and City Holding (the "Average Close Price"), which quotient will be
rounded to the nearest one-one thousandth (the "Exchange Ratio"); provided
that if the Average Close Price is $44.50 or greater, then the Exchange
Ratio shall be 1.011 and if the Average Close Price is $40.50 or less, then
the Exchange Ratio shall be 1.111.
<PAGE> 9
- - ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES
- - ------------------------------------------------------------------------------
Management determines the appropriate classification of securities at the time
of purchase. Debt securities are classified as held-to-maturity when Horizon has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of deferred
income taxes, reported in a separate component of shareholders' equity. Horizon
does not hold investment securities for trading purposes.
The amortized cost and estimated fair values of investment securities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of U.S.
government agencies and corporations $124,683 $1,407 $ (88) $126,002
Obligations of state and political subdivisions 27,144 648 (21) 27,771
Mortgage-backed securities 7,071 55 (29) 7,097
Other securities 7,666 123 (66) 7,723
-------- ------ ----- --------
Totals $166,564 $2,233 $(204) $168,593
======== ====== ===== ========
HELD-TO-MATURITY SECURITIES
Obligations of state and political subdivisions $ 40,430 $1,144 $ (2) $ 41,572
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of U.S.
government agencies and corporations $131,426 $1,206 $ (80) $132,552
Obligations of state and political subdivisions 21,038 642 - 21,680
Mortgage-backed securities 9,668 53 (49) 9,672
Other securities 9,873 111 (24) 9,960
-------- ------ ----- --------
Totals $172,005 $2,012 $(153) $173,864
======== ====== ===== ========
HELD-TO-MATURITY SECURITIES
Obligations of state and political subdivisions $ 41,554 $1,222 $ (5) $ 42,771
======== ====== ===== ========
</TABLE>
<PAGE> 10
- - ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. ALLOWANCE FOR LOAN LOSSES
- - ------------------------------------------------------------------------------
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
JUNE 30
1998 1997
------ -----
<S> <C> <C>
Balance at beginning of period $10,517 $ 9,607
Charge-offs (2,665) (1,462)
Recoveries 666 1,511
------- -------
Net charge-offs (1,999) 49
Provision for loan losses 1,266 1,100
------- -------
Balance at end of period $ 9,784 $10,756
======= =======
Allowance for loan losses as a % of total loans 1.29% 1.62%
Earnings coverage of net charge-offs 3.72X NA
</TABLE>
At June 30, 1998, the recorded investment in loans that are considered to be
impaired was not significant.
- - ------------------------------------------------------------------------------
NOTE 5. NEW ACCOUNTING STANDARDS
- - ------------------------------------------------------------------------------
On January 1, 1998, Horizon adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting For Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (Statement 125), relating
to repurchase agreements, securities lending and other similar transactions and
pledged collateral, which had been delayed until after December 31, 1997 by SFAS
No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125, an amendment of FASB Statement No. 125 (Statement 127). Statement 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a consistent
application of "financial-components approach" that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
financial liabilities when extinguished. Statement 125 provides standards for
consistently distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of the additional provisions
of Statement 125 as amended by Statement 127 resulted in no material impact on
Horizon's financial position or results of operations.
On January 1, 1998, Horizon also adopted SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
shareholders' equity and bypass net income. The adoption of Statement 130 did
not have a material impact on Horizon's financial position or results of
operations. Comprehensive income for the second quarter of 1998 and 1997
approximated $3,777 and $4,240.
<PAGE> 11
- - ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement 132, Employers' Disclosures About Pension and Other Postretirement
Benefits--an amendment of FASB Statements No. 87, 88, and 106. This Statement
revises employers' disclosures about pension and other postretirement benefit
plans, but does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements to the extent practicable, requires
additional information on changes in the benefit obligations and fair values
disclosures that are no longer as useful as they were when Statements 87, 88 and
106 were issued. This Statement is effective for fiscal years beginning after
December 15, 1997. These disclosure requirements will have no material impact on
Horizon's financial position or results of operations.
EXHBIT 99.B
- - ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - ------------------------------------------------------------------------------
INTRODUCTION
Horizon Bancorp, Inc., ("Horizon") is a multi-bank holding company headquartered
in Beckley, West Virginia. Horizon engages in commercial banking activities and
provides financial and trust services to individuals and commercial customers
primarily in Fayette, Greenbrier, Pocahontas, Raleigh, Summers, Cabell, Wayne,
and Lincoln Counties of West Virginia.
The following discussion and analysis is provided to assist readers of the
consolidated financial statements in understanding the operating performance of
Horizon. This discussion should be read in conjunction with the December 31,
1997 consolidated financial statements and the accompanying notes to the
financial statements included in the 1997 annual report.
Throughout the following discussion, dollars are expressed in thousands, except
per share data.
RESULTS OF OPERATIONS
Horizon reported consolidated net income for the first six months of 1998 of
$7,324, or $0.80 per share (diluted). For the six months ended June 30, 1997,
net income was $6,754, or $0.73 per share (diluted). Net income for the three
months ended June 30, 1998 was $3,700 or $0.40 per share (diluted), compared
with $3,512 or $0.38 per share (diluted) for the second quarter of 1997.
Return on average assets (ROA) measures the effectiveness of the utilization of
assets to produce net income while return on average equity (ROE) measures
income earned compared with the amount of shareholders' investment. For the six
months ended June 30, 1998, Horizon's ROA was 1.40%, compared to 1.44% for the
six months ended June 30, 1997. For the six months ended June 30, 1998,
Horizon's ROE totaled 12.77%, compared to 12.24% for the six months ended June
30, 1997.
NET INTEREST INCOME
Net interest income is Horizon's largest source of earnings. Net interest income
is influenced by the volume and relative yield of earning assets and cost of
interest-bearing liabilities and the relative sensitivity of such assets and
liabilities to changes in interest rates. Net interest income is presented and
discussed on a fully tax-equivalent basis in the following discussion.
Net interest income, on a fully taxable equivalent basis, increased $487 or
2.08% from $23,384 in the first six months of 1997 to $23,871 for the first six
months of 1998. It is noted that interest income increased $3,245 or 8.52% while
interest expense increased $2,758 or 18.73%. The increase in interest income
resulted from an increase in volume and changes in the mix of earning assets.
Average loans, Horizon's highest yielding assets, increased $101,269 or 15.73%
during the six months ended June 30, 1998, from the same period of 1997. For the
six months ended June 30, 1998, average investment securities declined $21,602
or 9.19% from the previous period of 1997. The decline in investment securities
was used to fund a portion of the loan growth. In addition, average federal
funds sold increased $21,569 or 504.07% during the periods analyzed primarily
due to growth of deposits.
The following table summarizes the composition of average interest-earning
assets and average interest-bearing liabilities, along with the related income
or expense and the weighted average yield or cost of such funds.
<PAGE> 13
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET INTEREST MARGIN
-----------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
-----------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCES EXPENSE COST BALANCES EXPENSE COST
-------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold $ 25,848 $ 708 5.5% $ 4,279 $ 114 5.3%
Investment securities (3): --
Taxable 150,215 4,803 6.4% 172,213 5,696 6.6%
Tax exempt (1) 63,252 2,381 7.5% 62,856 2,486 7.9%
-------------------------------- ------------------------------
Total investment securities 213,467 7,184 6.7% 235,069 8,182 7.0%
-------------------------------- ------------------------------
Total loans (1), (2) 744,870 33,462 9.0% 643,601 29,813 9.3%
-------------------------------- ------------------------------
Total earning assets and interest income 984,185 41,354 8.4% 882,949 38,109 8.6%
Noninterest earning assets:
Cash and due from banks 33,130 28,997
Premises and equipment 17,030 16,665
Other assets 21,259 22,262
Less: Allowance for loan losses (10,311) (10,114)
---------- --------
Total assets $1,045,293 $940,759
========== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits $ 151,213 $ 1,954 2.6% $128,168 $ 1,750 2.7%
Savings deposits 164,600 2,516 3.1% 174,748 2,638 3.0%
Time deposits 426,183 11,774 5.5% 374,412 9,860 5.3%
-------------------------------- ------------------------------
Total interest bearing deposits 741,996 16,244 4.4% 677,328 14,248 4.2%
Short-term borrowings 42,966 917 4.3% 25,075 477 3.8%
Long-term borrowings 7,767 322 8.3% -- -- 0.0%
-------------------------------- ------------------------------
Total interest bearing liabilities and interest expense 792,729 17,483 4.4% 702,403 14,725 4.2%
-------------------------------- ------------------------------
Noninterest bearing liabilities:
Demand deposits 117,568 115,746
Other 20,257 12,278
-------------------------------- ------------------------------
Total liabilities 930,554 830,427
------- -------
Shareholders' equity 114,739 110,332
------- -------
Total liabilities and shareholders' equity $1,045,293 $940,759
========== ========
Net interest income $23,871 $23,384
======= =======
Spread 4.0% 4.4%
=== ===
Net interest margin 4.9% 5.3%
=== ===
</TABLE>
(1) Fully taxable equivalent using 35%.
(2) Nonaccrual loans are included in average balances.
(3) Average balances of available-for-sale securities are stated at fair value.
<PAGE> 14
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
Horizon's net interest margin for the six months ended June 30, 1998, decreased
40 basis points from the net interest margin for the six months ended June 30,
1997. Average interest-bearing liabilities increased $90,326 or 12.86% from
$702,403 at June 30, 1997, to $792,729 at June 30, 1998. The increase is a
result of a $23,045 or 17.98% increase in interest-bearing demand deposits and
an increase of $51,771 or 13.83% in average certificates of deposit coupled with
a decrease of $10,148 or 5.81% in regular savings. A notable change in the mix
of interest-bearing deposits occurred in 1998 when compared to 1997. These
changes are due to the introduction of new products and a more rate sensitive
customer in today's market. Average short-term borrowings increased $17,891 or
71.35% due to management's efforts in developing relationships with commercial
customers using the repurchase agreement or sweep product. Average long-term
borrowings increased $7,767 or 100% from the same period in 1997 as a result of
the acquisition of Beckley Bancorp, Inc. during the third quarter of 1997.
ALLOWANCE FOR LOAN LOSSES
At June 30, 1998, the allowance for loan losses as a percentage of total loans
decreased to 1.29% from 1.44% at December 31, 1997. Net charge-offs were $1,999
for the six months ended June 30, 1998, compared to net recoveries of $49 for
the same period in 1997. The increase in net charge-offs was primarily due to
losses incurred from indirect originations by an auto dealer who was engaged in
fraudulent activities, an increase in consumer charge-offs, and growth in the
loan portfolio. Management feels the majority of the losses due to the dealer's
fraudulent activities have been realized. The provision for loan losses
increased $166 or 15.09% from $1,100 for the period ended June 30, 1997 to
$1,266 for the six months ended June 30, 1998.
For the three months ended June 30, 1998, Horizon's provision for loan losses
increased $157 or 39.25% to $557 compared to $400 for the same period in 1997.
Management feels the provision is adequate to maintain the allowance at the
current level which is supported by Horizon's internal monitoring system.
Total nonperforming loans were 1.34% of total loans at June 30, 1998, an
increase from the 1.01% at December 31, 1997. Nonperforming loans increased
$2,860 or 39% at June 30, 1998, from the $7,334 reported at December 31, 1997.
The increase was primarily due to two commercial loans being placed in
nonaccrual status during the first quarter of 1998. Presently, adequate
protection payments are being made on both loans. Restructured loans totaled
$538 at June 30, 1998. Collateral on these loans have been sold or leased with
the payments assigned to the restructured loans. Management believes that
established reserves for problem loans are adequate to cover potential loss
exposure on these loans. At June 30, 1998, nonperforming assets were 1.03% of
total assets, an increase from the 0.78% at December 31, 1997.
Other real estate totaled $567 at June 30, 1998, and represented a decrease of
$49 or 7.95% from $616 at December 31, 1997. Management anticipates no
significant difficulty in disposing of other real estate and believes that no
significant losses exist in this nonearning asset category.
<PAGE> 15
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANALYSIS OF ASSET
QUALITY
---------------------------
JUNE 30, DECEMBER 31,
1998 1997
---------------------------
<S> <C> <C>
Nonaccruing loans $ 5,001 $4,043
Loan ninety days past due and accruing interest 4,655 3,291
Restructured loans 538 --
------------------------
Total nonperforming loans 10,194 7,334
Other real estate owned 567 616
------------------------
Total nonperforming assets $10,761 $7,950
========================
Nonperforming loans to total loans 1.34% 1.01%
Nonperforming assets to total assets 1.03% 0.78%
Allowance for loan losses to nonperforming loans 95.98% 143.40%
</TABLE>
NONINTEREST INCOME
Noninterest income is primarily of a fee nature and includes service charges on
deposits, trust department income and a variety of miscellaneous transactions.
Total noninterest income increased $577 or 20.89% for the six months ended June
30, 1998, as compared to the six months ended June 30, 1997. The increase is
primarily due to an increase of $285 or 15.29% in service charges and fees
coupled with a $278 or 29.76% increase in other income. Increases in service
charges and fees are a result of the introduction of new products and an
improved collection percentage. Increases in other income are related to
increases in secondary market fees of $49 or 272%, gains on sale of loans of $60
or 429%, increases in miscellaneous income of $52 or 56.52%, and a $92 or 21.40%
increase in trust income.
Noninterest income increased $259 or 18.15% from a total of $1,427 for the three
months ended June 30, 1997, to a total of $1,686 for the three months ended June
30, 1998. The previous discussion of the increase in service charges and fees
and other income apply equally to the second quarter discussion.
NONINTEREST EXPENSE
Noninterest expense is frequently referred to as overhead, that is, the cost of
normal operations. Horizon's noninterest expense for the six months ended June
30, 1998, increased $513 or 3.81% over the six months ended June 30, 1997.
The overall increase consists of increases in equipment expense of $236, other
expenses of $241, salaries and employee benefits expense of $166 and outside
data processing costs of $74. These increases were offset by decreases in net
occupancy expense of $72 and advertising expense of $132.
Noninterest expenses for the three months ended June 30, 1998 increased $389 or
5.62% from $6,921 for the three months ended June 30, 1997. The previous
discussion of the changes in other expense apply equally to the second quarter
discussion.
IMPACT OF YEAR 2000
Management has initiated a Company-wide program to assess the need to modify or
replace all or portions of its information systems to enable the proper
processing of transactions relating to the Year 2000 and beyond. Most of
Horizon's core data and item processing systems, telecommunication systems,
auxiliary and critical support system services are contracted through major
nationally prominent vendors. Primary exposure for Horizon resides in its
dependence upon these third party providers for services. Horizon has initiated
formal communications with all of its significant outside vendors and suppliers
to determine the extent to which Horizon's systems are vulnerable to these
parties' ability to remediate their own Year 2000 issues. Management
anticipates completing its analysis during 1998 and to be Year 2000 compliant
by December 31, 1998. Horizon has completed a comprehensive Year 2000
Contingency Plan and Testing Plan and will begin Phase I testing of core
applications with its third party service provider the week of August 17, 1998.
There is no guarantee that the systems of other companies on which Horizon
systems rely will be converted timely and would not have an adverse effect on
Horizon's systems. Until a complete analysis of the various alternatives
available to the Company is completed, an estimate of the total cost of the
Year 2000 project cannot be made. However, management's current assessment is
that the overall cost to Horizon of compliance with Year 2000 issues will be
immaterial. The costs of the Year 2000 project and the date on which Horizon
believes it will be Year 2000 compliant are based upon management's best
estimates utilizing numerous assumptions of future events and third party
vendor modifications.
<PAGE> 16
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
INCOME TAXES
Income tax expense expressed as a percentage of income before income taxes was
34.40% for the six months ended June 30, 1998, compared to 35.27% for the six
months ended June 30, 1997.
BALANCE SHEET ANALYSIS
At June 30, 1998, total assets increased $20,226 or 1.98% from the December 31,
1997 total of $1,020,281. Investment securities totaled $209,023 at June 30,
1998, and have decreased $6,395 or 2.97% from the December 31, 1997 total of
$215,418. The decrease was attributable to the funding of loan growth through
investment security maturities as total loans increased $31,677 or 4.35% for the
six months ended June 30, 1998. The increase in loans was due primarily to more
favorable economic conditions in the market area and management's willingness to
increase its market share through lending activities.
Total deposits at June 30, 1998 were $861,506 and have increased $20,199 or
2.40% from the December 31, 1997 total of $841,307. Non-interest bearing
deposits increased $6,886 or 6.07% while interest bearing deposits increased
$13,313 or 1.83%. At June 30, 1998, short and long-term borrowings approximated
$43,704 and $5,972 compared to $42,642 and $7,102, respectively at December 31,
1997.
Shareholders' equity increased $1,890 or 1.66% from the total at December 31,
1997. The increase was primarily due to the retention of earnings of $3,848 and
an increase in unrealized gain on available-for-sale securities of $124, net of
an increase in treasury shares purchased of $2,114, from $2,938 at December 31,
1997 to $5,052 at June 30, 1998.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Horizon's liquidity position is believed to be adequate for the availability of
funds for loan growth and deposit withdrawals and to provide for other
transaction requirements. Liquidity is provided primarily by investments in cash
and cash equivalents and maturities of investments and loans. Horizon's
liquidity position is monitored regularly, and management is not aware of any
trends, commitments or events that are likely to negatively impact liquidity.
Interest rate risk is measured through a static gap analysis and monitored
closely by management. Due to Horizon's stable core deposit base, management has
been able to effectively manage interest rate risk without the use of derivative
products.
CAPITAL RESOURCES AND DIVIDENDS
Average shareholders' equity when expressed as a percentage of average total
assets equaled 10.98% on June 30, 1998, a decrease from the 11.56% reported at
December 31, 1997. The primary capital ratio, which includes equity plus the
allowance for loan losses, was 11.97% on June 30, 1998, and has decreased
slightly from the 12.08% reported on December 31, 1997. The Federal regulatory
agencies have adopted risk-based capital guidelines, and Horizon continues to be
well above the minimum guidelines for all risk-based ratios.
<PAGE> 17
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
In the first quarter 1998, Horizon entered into two credit agreements with
unrelated parties to provide long-term financing. These agreements, in addition
to those noted in Note 9 of the 1997 Annual Report, provide revolving lines of
credit of $15,000 to Horizon. As of June 30, 1998, $5,900 was outstanding.
Horizon does not anticipate any material capital expenditures in 1998. Earnings
from subsidiary bank operations are expected to remain adequate to fund payment
of stockholders' dividends and normal internal growth. In management's opinion,
subsidiary banks have the capability to upstream sufficient dividends to meet
normal cash requirements of Horizon.
Pertinent capital ratios were:
MINIMUM
JUNE 30 DECEMBER 31 REGULATORY
1998 1997 REQUIREMENTS
-------------------------------------
Shareholders' Equity/Total Assets 11.14% 11.18% -
Primary Capital Ratio 11.97% 12.08% -
Risk-Adjusted Capital
Total Capital to Risk Weighted Assets 14.63% 16.40% 8.00%
Tier 1 to Risk Weighted Assets 15.83% 15.20% 4.00%
Tier 1 to Average Assets 10.34% 11.10% 3.00%
Management is not aware of any trends, events, or uncertainties, either
favorable or unfavorable, which are likely to have a material effect on
Horizon's liquidity, capital resources or results of operations. There are no
current recommendations by regulatory authorities that, if implemented, would
have a material effect on Horizon.
EXHIBIT 99.C
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,262 $ 36,503
Federal funds sold 14,035 2,455
--------------------------------
Cash and cash equivalents 45,297 38,958
Investment securities:
Available-for-sale at fair value 173,864 205,923
Held-to-maturity (approximate fair value of $42,771 and
$43,354 at December 31, 1997 and 1996) 41,554 42,741
Total loans 728,239 633,984
Less: Allowance for loan losses (10,517) (9,607)
--------------------------------
Net loans 717,722 624,377
Premises and equipment, net 17,123 16,580
Accrued interest receivable and other assets 24,721 18,489
--------------------------------
Total assets $1,020,281 $947,068
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 113,415 $119,831
Interest bearing 727,892 678,165
--------------------------------
Total deposits 841,307 797,996
Short-term borrowings 42,642 29,154
Long-term borrowings 7,102 -
Accrued interest payable and other liabilities 15,208 10,507
--------------------------------
Total liabilities 906,259 837,657
Shareholders' Equity:
Common stock, $1 par value; 20,000 shares authorized and 9,316 shares issued,
including 106 and 11 shares in treasury at December 31, 1997 and 1996
9,310 9,308
Capital surplus 19,784 19,757
Retained earnings 86,768 79,876
Treasury stock, at cost (2,938) (175)
Unrealized gain on available-for-sale securities, net 1,098 645
--------------------------------
Total shareholders' equity 114,022 109,411
--------------------------------
Total liabilities and shareholders' equity $1,020,281 $947,068
================================
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 23
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $61,916 $57,577 $54,921
Interest and dividends on investment securities:
Taxable 10,835 12,579 12,185
Tax-exempt 3,200 2,673 2,355
Federal funds sold and other 419 810 1,157
-----------------------------------------
Total interest income 76,370 73,639 70,618
Interest expense:
Deposits 29,921 28,424 26,869
Short-term borrowings 1,352 846 731
Other 48 - -
-----------------------------------------
Total interest expense 31,321 29,270 27,600
-----------------------------------------
Net interest income 45,049 44,369 43,018
Provision for loan losses 2,402 3,334 2,505
-----------------------------------------
Net interest income after provision for loan losses 42,647 41,035 40,513
Other income:
Service charges and fees 3,938 3,432 3,256
Trust income 921 923 887
Investment securities losses (18) (79) (131)
Other 1,056 1,074 985
-----------------------------------------
Total other income 5,897 5,350 4,997
Other expenses:
Salaries and employee benefits 12,845 12,878 12,567
Net occupancy and equipment expense 4,196 3,624 3,822
Outside data processing 2,069 1,996 1,986
Federal deposit insurance 95 11 986
Advertising 533 585 758
Other 7,491 9,990 7,902
-----------------------------------------
Total other expenses 27,229 29,084 28,021
-----------------------------------------
Income before income taxes 21,315 17,301 17,489
Applicable income taxes 7,488 6,150 6,007
-----------------------------------------
Net income $13,827 $11,151 $11,482
=========================================
Earnings per common share:
Basic $1.49 $1.20 $1.23
=========================================
Diluted $1.49 $1.20 $1.23
=========================================
Average common shares outstanding:
Basic 9,254 9,296 9,298
=========================================
Diluted 9,278 9,308 9,301
=========================================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 24
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN
ON
AVAILABLE DEFERRED
COMMON CAPITAL RETAINED TREASURY FOR SALE ESOP
STOCK SURPLUS EARNINGS STOCK SECURITIES BENEFITS TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $4,653 $19,744 $71,163 $ -- $(2,547) $ (121) $ 92,892
Net income -- -- 11,482 -- -- -- 11,482
Cash dividends declared by pooled
companies:
Horizon ($0.53 per share) -- -- (2,973) -- -- -- (2,973)
Twentieth (1,080) (1,080)
Purchase of treasury shares -- -- -- (175) -- -- (175)
Reduction in ESOP indebtedness -- -- -- -- -- 121 121
Change in unrealized (loss) gain
on available-for-sale
securities, net of deferred
income taxes -- -- -- -- 4,116 -- 4,116
---------------------------------------------------------------------------------
Balances at December 31, 1995 4,653 19,744 78,592 (175) 1,569 -- 104,383
Net income -- -- 11,151 -- -- -- 11,151
Cash dividends declared by pooled
companies:
Horizon ($0.62 per share) -- -- (4,673) -- -- -- (4,673)
Twentieth (540) (540)
Redemption of fractional shares
in pooling -- (6) -- -- -- -- (6)
Stock options exercised 1 19 -- -- -- -- 20
Two for one stock split in the
form of a 100% stock dividend 4,654 -- (4,654) -- -- -- --
Change in unrealized gain on
available-for-sale securities,
net of deferred income taxes -- -- -- -- (924) -- (924)
---------------------------------------------------------------------------------
Balances at December 31, 1996 9,308 19,757 79,876 (175) 645 -- 109,411
Net income -- -- 13,827 -- -- -- 13,827
Cash dividends declared ($0.75
per share) -- -- (6,935) -- -- -- (6,935)
Purchase of treasury shares -- -- -- (2,763) -- -- (2,763)
Stock options exercised 2 27 -- -- -- -- 29
Change in unrealized gain on
available-for-sale securities,
net of deferred income taxes -- -- -- -- 453 -- 453
---------------------------------------------------------------------------------
Balances at December 31, 1997 $9,310 $19,784 $86,768 $(2,938) $ 1,098 $ -- $114,022
=================================================================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 25
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
HORIZON BANCORP, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $13,827 $11,151 $11,482
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,762 1,524 1,669
Provision for loan losses 2,402 3,334 2,505
Deferred income tax benefit (231) (971) (786)
Amortization 306 618 758
Loss on sale of investment securities 18 79 131
Gain on sale of assets -- (48) --
Change in accrued interest receivable and other assets (886) 136 (1,075)
Change in accrued interest payable and other liabilities 2,852 (245) 3,501
-----------------------------------------
Net cash provided by operating activities 20,050 15,578 18,185
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities 48,893 24,907 4,818
Proceeds from maturities of available-for-sale securities 26,965 40,524 14,624
Purchases of available-for-sale securities (23,412) (66,213) (59,163)
Proceeds from maturities of held-to-maturity securities 1,480 19,527 42,535
Purchases of held-to-maturity securities -- (12,845) (15,677)
Net increase in loans (74,647) (15,663) (23,423)
Purchases of premises and equipment (1,537) (1,258) (5,021)
(Sale) purchase of branches, net of cash paid or received -- (4,588) 3,456
Cash paid in acquisition, net of cash received (13,642) -- --
-----------------------------------------
Net cash used in investing activities (35,900) (15,609) (37,851)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 11,268 (2,767) 21,979
Proceeds from long-term borrowings 7,102 -- --
Increase in short-term borrowings 13,488 6,968 2,146
Cash dividends paid (6,935) (5,213) (4,053)
Stock options exercised and fractional shares 29 14 --
Acquisition of treasury shares (2,763) -- (175)
-----------------------------------------
Net cash provided by (used in) financing activities 22,189 (998) 19,897
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 6,339 (1,029) 231
Cash and cash equivalents at beginning of year 38,958 39,987 39,756
-----------------------------------------
Cash and cash equivalents at end of year $45,297 $38,958 $39,987
=========================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 26
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
HORIZON BANCORP, INC.
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION
Horizon Bancorp, Inc. (Horizon) is a bank holding company with five banking
subsidiaries engaged in community banking activities and providing financial
services to individuals and businesses throughout southeastern and southwestern
West Virginia. Horizon considers all of its principal business activities to be
bank related.
BASIS OF ACCOUNTING
The accounting and reporting policies of Horizon conform to generally accepted
accounting principles and to general practices within the banking industry. The
accompanying consolidated financial statements include the accounts of Horizon
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The following is a summary
of the more significant policies.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Horizon considers cash and due from banks and federal funds sold as cash and
cash equivalents.
INVESTMENT SECURITIES
Management determines the appropriate classification of securities at the time
of purchase. Debt securities are classified as held-to-maturity when Horizon has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of deferred
income taxes, reported as a separate component of shareholders' equity.
Horizon does not hold investment securities for trading purposes.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is maintained at a level believed by management to
be adequate to absorb estimated loan losses. Management's periodic evaluation of
the adequacy of the allowance is based on Horizon's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans.
The evaluation of the adequacy of the allowance for loan losses is inherently
subjective as it requires material estimates including the amounts and timing of
future cash flows expected to be received on impaired loans that may be
susceptible to significant change.
INTANGIBLE ASSETS
37
<PAGE> 27
Goodwill is being amortized on a straight-line basis over 15 years. Management
periodically reviews goodwill and other intangibles for possible impairment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation expense is computed principally on the straight-line method over
the estimated useful lives of the assets.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements at the statutory tax rate.
REVENUE RECOGNITION
Interest on loans and amortization of unearned income are computed by methods
which generally result in level rates of return on principal amounts
outstanding. Loan origination and commitment fees and direct loan origination
costs other than dealer related expenses are being recognized as collected and
incurred. The use of this method of recognition does not produce results that
are materially different from results which would have been produced if such
costs and fees were deferred and amortized as an adjustment of the loan yield
over the life of the related loan.
The accrual of interest income on commercial and real estate loans is generally
discontinued when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, unpaid interest credited to income in
the current year is reversed, and interest accrued in prior years is charged to
the allowance for loan losses. Management may elect to continue the accrual of
interest when the estimated net realizable value of collateral is sufficient to
cover the principal balance and accrued interest, and the loan is in the process
of collection. Generally, loans are restored to accrual status when the
obligation becomes current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
EMPLOYEE BENEFIT PLAN
Horizon has a defined benefit pension plan covering substantially all its
employees. Pension costs are actuarially determined and charged to expense.
Horizon provides no postretirement benefits other than pension benefits or
postemployment benefits.
Horizon provides certain officers and directors with deferred compensation and
supplemental retirement benefits. Estimated amounts to be paid under the
deferred compensation and supplemental retirement agreements are accrued over
the period of the employees or directors active employment from the time the
agreement is signed to the employee or directors full eligibility date.
STOCK-BASED COMPENSATION
Horizon follows the intrinsic value method in accounting for its stock options.
Under the intrinsic value method, compensation expense is determined on the
measurement date, that is, the first date on which both the number of shares the
employee is entitled to receive, and the exercise price are known and is
measured based on the award's intrinsic value--the excess of the market price of
the stock over the exercise price on the measurement date. For Horizon's stock
options, the intrinsic value on the measurement date (which is the date of
grant) is zero, and no compensation expense is recognized.
NET INCOME PER COMMON SHARE
Horizon adopted the provision of Statement of Financial Accounting Standards
(SFAS No. 128) effective December 31, 1997. Under SFAS No. 128, basic earnings
per share is computed by dividing net income by the weighted average number of
shares of common stock outstanding. Diluted earnings per share is based upon net
income divided by the weighted-average number of shares outstanding increased by
the number of incremental shares of common stock which would be issued assuming
the exercise of stock options. The impact of this change was insignificant. The
incremental shares related to the options were 24, 12, and 3, in 1997, 1996, and
1995, respectively.
NEW ACCOUNTING STANDARDS
During 1997, the FASB issued several new accounting pronouncements which will
become effective in 1998. These pronouncements include SFAS No. 129, Disclosure
of Information about Capital Structure; SFAS No. 130, Reporting Comprehensive
Income; and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company is in the process of fully evaluating these
new pronouncements and expects to adopt them in 1998 in accordance with the
requirements. Such adoption is not expected to have a significant impact on the
financial position or results of operations of the Company.
38
<PAGE> 28
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which is
applicable to Horizon effective January 1, 1997. In October 1996, the FASB
agreed to defer the effective date for one year for the following transactions:
securities lending, repurchase agreements, dollar rolls, and other similar
secured transactions. Statement No. 125 establishes standards for determining
whether certain transfers of financial assets should be considered sales of all
or part of the assets or as secured borrowings. Statement No. 125 also
establishes standards for settlements of liabilities through the transfer of
assets to a creditor or obtaining an unconditional release and whether these
settlements should prove the debt extinguished. The adoption of this standard
did not and is not expected to have a material impact on Horizon's financial
statements.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation. Such reclassifications had no impact on net
income or shareholders' equity.
- --------------------------------------------------------------------------------
2. ACQUISITIONS
- --------------------------------------------------------------------------------
In the fourth quarter of 1997, Horizon announced that it had entered into a
non-binding letter of intent for the acquisition of Bank of Mingo (Mingo)
through a merger of Mingo into Horizon. Mingo operates three banking offices in
West Virginia with total assets of $66.3 million at December 31, 1997. The
transaction is valued at $18.0 million and is subject to approval by the
appropriate regulatory authorities and the stockholders of Mingo with an
expected closing during the second quarter of 1998. The acquisition will be
accounted for under the purchase method of accounting.
In September 1997, Horizon consummated its acquisition of Beckley Bancorp, Inc.
(Beckley), headquartered in Beckley, West Virginia. Under the terms of the
agreement, Horizon paid $15.4 million in cash. The acquisition was accounted for
as a purchase transaction and accordingly, the results of operations
attributable to the acquisition have been included in the consolidated totals
from the date of acquisition. The excess of the purchase price over the fair
market value of the net assets (i.e. goodwill) of Beckley approximated $4.5
million and is being amortized over a period of 15 years. Since the acquisition
was not significant no proforma financial information has been included.
In August 1996, Horizon acquired Twentieth Bancorp, Inc. (Twentieth),
headquartered in Huntington, West Virginia. The transaction was accounted for
under the pooling of interests method, and accordingly, the consolidated
financial statements for all periods presented have been restated to include the
financial information of Twentieth.
In prior years, Horizon has acquired banks in acquisitions accounted for using
the purchase method of accounting. The purchase prices were allocated to the
identifiable tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair value at the date of consummation. Deposit base
intangibles, included in other assets approximated $419 at December 31, 1997.
Goodwill, also included in other assets, approximated $5,330 and $1,012 at
December 31, 1997 and 1996 respectively net of amortization. Amortization of
intangibles approximated $449, $341, and $374 in 1997, 1996, and 1995.
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of investment securities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of U.S.
government agencies and corporations
$131,426 $1,206 $ (80) $132,552
Obligations of states and political subdivisions 21,038 642 21,680
Mortgage-backed securities 9,668 53 (49) 9,672
Other equity securities 9,873 111 (24) 9,960
---------------------------------------------------------------
Totals $172,005 $2,012 $(153) $173,864
===============================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
Obligations of states and political subdivisions $ 41,554 $1,222 $(5) $ 42,771
===============================================================
</TABLE>
39
<PAGE> 29
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of U.S.
government agencies and corporations $154,053 $1,140 $(354) $154,839
Obligations of states and political subdivisions 21,121 345 (23) 21,443
Mortgage-backed securities 15,219 63 (135) 15,147
Other equity securities 14,441 91 (38) 14,494
---------------------------------------------------------------
Totals $204,834 $1,639 $(550) $205,923
===============================================================
HELD-TO-MATURITY SECURITIES
Obligations of states and political subdivisions $ 42,741 $ 756 $(143) $ 43,354
===============================================================
</TABLE>
In accordance with provisions of FASB 115, Accounting for Certain Investments in
Debt and Equity Securities, Horizon chose to reclassify securities held by
Twentieth Bancorp, Inc., at the time of its acquisition in August 1996, from
held-to-maturity to available-for-sale. At the date of transfer, the amortized
cost of those securities was $17,806 and the unrealized gain on those securities
was $57 (net of $40 in deferred income taxes), which is included in
shareholders' equity.
On November 15, 1995, the FASB staff issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report,
Horizon chose to reclassify securities from held-to-maturity to
available-for-sale. At the date of transfer, the amortized cost of those
securities was $44,586 and the unrealized gain on those securities was $275 (net
of $191 in deferred income taxes), which is included in shareholders' equity.
The amortized cost and estimated fair values of investment securities at
December 31, 1997, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because certain securities include the
right to call or prepay the obligations prior to their contractual maturities.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 33,942 $ 33,935
Due after one year but through five years 73,349 74,285
Due after five years but through ten years 47,967 48,658
Due after ten years 7,046 7,314
Mortgage-backed securities 9,701 9,672
----------------------------------
$ 172,005 $ 173,864
==================================
HELD-TO-MATURITY
Due in one year or less $ 612 $ 623
Due after one year but through five years 13,332 13,642
Due after five years but through ten years 21,485 22,147
Due after ten years 6,125 6,359
----------------------------------
$ 41,554 $ 42,771
==================================
</TABLE>
During the years ended December 31, 1997, 1996, and 1995, available-for-sale
securities with a fair value at the date of sale of $48,900, $24,900, and $4,800
were sold. The gross realized gains on such sales totaled $42, $20, and $0 and
the gross realized losses totaled $60, $99, and $131 in 1997, 1996, and 1995.
40
<PAGE> 30
At December 31, 1997 and 1996, investment securities with carrying amounts of
$68,200 and $44,817, respectively, were pledged to secure public deposits,
repurchase agreements, and for other purposes as required or permitted by law.
- --------------------------------------------------------------------------------
4. LOANS
- --------------------------------------------------------------------------------
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
Commercial $232,076 $218,714
Real estate - construction 6,278 8,065
Real estate - mortgage 270,149 228,447
Consumer loans 219,736 178,758
--------------------------------
Total loans 728,239 633,984
Less allowance for loan losses (10,517) (9,607)
--------------------------------
Net loans $717,722 $624,377
================================
</TABLE>
Horizon's subsidiaries have granted loans to officers and directors of Horizon
and its subsidiaries and to their associates. Related party loans were made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the same time for comparable transactions with unrelated persons
and do not involve more than normal risk of collectibility.
The following presents the activity with respect to related party loans during
1997:
<TABLE>
<S> <C>
Balance at January 1, 1997 $16,717
Loans made 3,535
Principal collected (7,448)
Other changes 96
--------------
Balance at December 31, 1997 $12,900
==============
</TABLE>
Other changes primarily represent additions to and changes in director and
executive officer status.
- --------------------------------------------------------------------------------
5. ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 9,607 $8,522 $8,153
Charge-offs (3,853) (3,636) (2,789)
Recoveries 2,052 1,387 653
-------------------------------------
Net charge-offs (1,801) (2,249) (2,136)
Provision for loan losses 2,402 3,334 2,505
Balance of acquired institution 309 -- --
-------------------------------------
Balance at end of year $10,517 $9,607 $8,522
=====================================
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired approximated $2,700 and $5,700 (of which $2,200 and
$1,600 were on a nonaccrual basis). Included in this amount are $2,000 and
$2,600 of impaired loans for which the related allowance for loan losses is $770
and $790; and $700 and $3,100 of impaired loans that, as a result of write-downs
or being
41
<PAGE> 31
well secured, do not have an allowance for loan losses. The average recorded
investment in impaired loans during the years ended December 31, 1997, 1996, and
1995 approximated $3,400, $7,300 and $6,500. For the years ended December 31,
1997, 1996, and 1995, Horizon recognized interest income on those impaired loans
of $240, $440, and $430 which included $200, $400 and $430 of interest income
recognized using the cash basis method of income recognition.
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The major categories of premises and equipment and related accumulated
depreciation are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Land $ 2,860 $ 2,791
Building and improvements 17,722 17,065
Furniture and equipment 13,942 12,678
---------------------------
34,524 32,534
Less accumulated depreciation (17,401) (15,954)
---------------------------
$ 17,123 $ 16,580
===========================
</TABLE>
Horizon has entered into noncancelable operating lease agreements with respect
to certain premises and equipment. The minimum annual rental commitment under
these operating leases is: 1998--$61; 1999--$26; 2000--$21; 2001--$21;
2002--$16; with $1,100, of commitments extending beyond 2002.
Total rent expense, including cancelable and noncancelable leases, approximated
$273, $200, and $175, in 1997, 1996, and 1995, respectively.
- --------------------------------------------------------------------------------
7. DEPOSITS
- --------------------------------------------------------------------------------
Interest-bearing deposits include various time deposit products. Time deposits
outstanding at December 31, 1997, have scheduled maturities of $292,674 in 1998,
$63,677 in 1999, $17,118 in 2000, $3,038 in 2001, and $49,640 in 2002 and $115
thereafter. At December 31, 1997 and 1996, time deposits exceeding $100
approximated $77,444 and $65,173.
Interest paid on deposits and short-term borrowings approximated $30,600,
$29,700, and $25,400 in 1997, 1996, and 1995.
- --------------------------------------------------------------------------------
8. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Certain of Horizon's subsidiary banks are members of the Federal Home Loan Bank
of Pittsburgh (FHLB). One benefit of being a member of the FHLB is that it
provides Horizon with an additional source of short-term and long-term funding,
in the form of collateralized advances. At December 31, 1997, Horizon is
entitled to receive approximately $131,000 in collateralized advances from the
FHLB at prevailing interest rates, subject to satisfying the Capital Stock
Requirement provisions of the Agreement, as defined.
Short-term borrowings consist primarily of securities sold under agreements to
repurchase and federal funds purchased. The weighted average interest rate on
short-term borrowings approximated 4.8% and 4.5% at December 31, 1997 and 1996.
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
- --------------------------------------------------------------------------------
In October 1997, Horizon entered into two credit agreements with an unrelated
party to provide long-term financing. The agreements provided a term loan of
$4,000 and a revolving loan of $3,000 to Horizon, and at December 31, 1997, the
full loan amount of each was outstanding. The loans bear interest at 1.15% over
LIBOR. Principal payments on the term loan are due quarterly beginning January
1998 and ending October 2002. The revolving loan expires in October 1998 but can
be extended upon the agreement of both parties. The loan agreements contain
certain restrictive covenants, relating to capital adequacy, non-performing
assets and debt to equity ratios.
Maturities of long-term debt are as follows:
1998 $3,816
1999 816
2000 818
42
<PAGE> 32
2001 820
2002 820
Thereafter 12
----------
Total $7,102
==========
- --------------------------------------------------------------------------------
10. INCOME TAXES
- --------------------------------------------------------------------------------
Significant components of Horizon's deferred tax assets and liabilities, which
are included in other assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $4,250 $3,627
Accrued employee benefits 1,874 1,614
Other 83 95
-------------------------
Total deferred tax assets 6,207 5,336
Deferred tax liabilities:
Loans 914 63
Available-for-sale securities 762 442
Premises and equipment 812 542
Other 364 185
-------------------------
Total deferred tax liabilities 2,852 1,232
-------------------------
Net deferred tax assets $3,355 $4,104
=========================
</TABLE>
The applicable income tax provisions included in the consolidated statements of
income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Current:
Federal $6,551 $6,040 $5,822
State 1,168 1,081 971
-------------------------------------
Total current 7,719 7,121 6,793
Deferred:
Federal (196) (830) (688)
State (35) (141) (98)
-------------------------------------
Total deferred (231) (971) (786)
-------------------------------------
Total $7,488 $6,150 $6,007
=====================================
</TABLE>
43
<PAGE> 33
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory federal rate $7,460 35.0% $6,055 35.0% $6,121 35.0%
Plus: State income tax, net of
federal tax benefits 737 3.5 611 3.5 570 3.3
------------------------------------------------------------------
8,197 38.5 6,666 38.5 6,691 38.3
(Decrease) increase in taxes
resulting from:
Tax-exempt interest (1,027) (4.8) (911) (5.3) (840) (4.8)
Other - net 318 1.4 395 2.3 156 0.8
------------------------------------------------------------------
$7,488 35.1% $6,150 35.5% $6,007 34.3%
==================================================================
</TABLE>
Income taxes relating to securities transactions approximated $(44), $(32), and
$(54) in 1997, 1996, and 1995, respectively.
Income taxes paid approximated $7,300, $6,800, and $6,750 in 1997, 1996, and
1995, respectively.
- --------------------------------------------------------------------------------
11. EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
Horizon has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during employment. Horizon's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes.
The following table sets forth the Plan's funded status and amounts recognized
in Horizon's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation $ 6,123 $ 5,202
Nonvested benefit obligation 222 185
-------------------------
Accumulated benefit obligation 6,345 5,387
Effect of estimated future compensation increases 2,525 2,140
-------------------------
Projected benefit obligation 8,870 7,527
Plan assets at fair value 8,093 6,766
-------------------------
Projected benefit obligation in excess of plan assets (777) (761)
Unrecognized prior service cost 1,142 1,277
Unrecognized net asset at transition, net of amortization (316) (346)
Unrecognized net gain from past experience different
from that assumed (1,927) (1,420)
-------------------------
Accrued pension cost included in other liabilities $(1,878) $(1,250)
=========================
</TABLE>
Following is a summary of the components of net periodic pension cost:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $751 $513 $463
Interest cost on projected benefit obligation 561 547 485
Actual return on plan assets (1,297) (863) (970)
Net amortization and deferral 727 368 558
-------------------------------------
Net periodic pension cost $742 $565 $536
=====================================
</TABLE>
44
<PAGE> 34
Assumptions used in the accounting for defined benefit plans were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.75% 7.50%
Rate of increase in future compensation levels 5.00% 6.00% 6.00%
Expected long-term rate of return on plan assets 8.00% 8.50% 8.50%
</TABLE>
Plan assets consist principally of U.S. Government securities, corporate stocks
and bonds, and other short-term investments. The unrecognized net gain increased
in 1997 due to the change in the weighted average discount rate.
Horizon has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of active service from the date of
the respective agreement. The cost of such agreements approximated $395, $420,
and $490 during 1997, 1996, and 1995. The liability for such agreements
approximated $2,254 and $2,440 at December 31, 1997 and 1996, and is included in
other liabilities in the accompanying consolidated balance sheets.
To assist in funding the above liabilities, Horizon has insured the lives of
certain directors and officers. Horizon is the owner and beneficiary of the
insurance policies with a cash surrender value approximating $3,107 and $2,900
at December 31, 1997 and 1996, included in other assets in the accompanying
consolidated balance sheets.
During 1995, the Horizon Employee Stock Ownership Plan (ESOP) retired its
remaining outstanding debt and distributed the plan assets to the plan
participants.
- --------------------------------------------------------------------------------
12. STOCK OPTION PLAN
- --------------------------------------------------------------------------------
Horizon has an incentive stock option plan for certain key employees. Pursuant
to this plan, an aggregate maximum of 200,000 shares of common stock were
reserved for issuance, however, no more than 20,000 options may be issued in any
calendar year. All options granted have 5 year terms and vest over a three year
period.
The exercise price of Horizon's stock options granted equals the market price of
the underlying stock on the date of the grant. Accordingly, no compensation is
recognized for the options granted. Pro forma net income and earnings per share,
applying the fair value method to options awarded has not been included herein
because amounts would not be materially different from amounts reported in the
consolidated financial statements.
A summary of Horizon's stock option activity, and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 75 $17 60 $16
Granted 20 29 20 20
Exercised (2) 15 (1) 15
Forfeited (1) 14 (4) 15
-------------- --------------
Outstanding at end of year 92 $20 75 $17
============== ==============
Exercisable at end of year 33 $16 15 $14
Weighted-average fair value of options
granted during the year $5.50 $3.54
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, ranged from
$14.25 to $29.00. The weighted-average remaining contractual life of those
options is 3 years.
45
<PAGE> 35
- --------------------------------------------------------------------------------
13. REGULATORY MATTERS
- --------------------------------------------------------------------------------
Horizon's subsidiaries are required to maintain average balances with the
Federal Reserve Bank or as cash in vault. The average amount of the required
reserve balances for the year ended December 31, 1997, was approximately $8,800.
Horizon and its banking subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines, Horizon and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of Horizon and its banking
subsidiaries' assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Horizon and its banking
subsidiaries' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures require Horizon and its banking subsidiaries to maintain
minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that Horizon and its banking subsidiaries
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation and the Office of the Comptroller of the Currency
categorized Horizon and its banking subsidiaries as well capitalized. To be
categorized as well capitalized, Horizon and its banking subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
However, the volatility of the unrealized gain or loss on available-for-sale
securities, which is a component of capital, may significantly affect capital
adequacy in the future.
Horizon and its three significant subsidiaries' actual capital amounts and
ratios are presented in the following table.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------
WELL
MINIMUM CAPITALIZED
AMOUNT RATIO AMOUNT RATIO RATIO RATIO
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Horizon Bancorp 115,812 16.4% 115,917 17.8% ->8.0% ->10.0%
Bank of Raleigh 45,694 15.8% 38,949 15.6% ->8.0% ->10.0%
Twentieth Street Bank 33,669 15.8% 34,787 17.1% ->8.0% ->10.0%
Greenbrier Valley National Bank 19,358 17.9% 18,808 16.8% ->8.0% ->10.0%
Tier I Capital (to Risk Weighted Assets):
Horizon Bancorp 107,452 15.2% 107,754 16.5% ->4.0% ->6.0%
Bank of Raleigh 42,485 14.7% 35,833 14.4% ->4.0% ->6.0%
Twentieth Street Bank 31,020 14.6% 32,241 15.8% ->4.0% ->6.0%
Greenbrier Valley National Bank 18,008 16.6% 17,412 15.6% ->4.0% ->6.0%
Tier I Capital (to Average Assets):
Horizon Bancorp 107,452 11.1% 107,754 11.4% ->4.0% ->5.0%
Bank of Raleigh 42,485 12.5% 35,833 11.4% ->4.0% ->5.0%
Twentieth Street Bank 31,020 10.2% 32,241 10.0% ->4.0% ->5.0%
Greenbrier Valley National Bank 18,008 10.2% 17,412 10.1% ->4.0% ->5.0%
</TABLE>
The primary source of funds for the dividends paid by Horizon to its
shareholders is dividends received from its subsidiary banks. Dividends paid by
the subsidiary banks are subject to restriction by banking regulations. The most
restrictive provision requires approval by the appropriate regulatory agency if
dividends declared in any year exceed the current year's net income, plus the
retained net profits of the two preceding years. During 1997, the subsidiary
banks' net retained profits available for distribution to Horizon as dividends,
without regulatory approval, approximate $2,760, plus net income for the interim
period through the date of declaration.
46
<PAGE> 36
- --------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
In the normal course of business, Horizon offers certain financial products to
its customers to aid them in meeting their requirements for liquidity and credit
enhancement. Generally accepted accounting principles require that these
products be accounted for as contingent liabilities and, accordingly, they are
not reflected in the accompanying financial statements. Horizon's exposure to
loss in the event of nonperformance by the counterparty for commitments to
extend credit and standby letters of credit is the contract or notional amounts
of these instruments. Management does not anticipate any material losses as a
result of these commitments and contingent liabilities. Following is a
discussion of these commitments and contingent liabilities.
STANDBY LETTERS OF CREDIT--These agreements are used by Horizon's
customers as a means of improving their credit standing in their dealings
with others. Under these agreements, Horizon guarantees certain financial
commitments in the event that its customers are unable to satisfy their
obligations. Horizon had issued standby letters of credit of $6,300 and
$5,100 at December 31, 1997 and 1996.
LOAN COMMITMENTS--At December 31, 1997 and 1996, Horizon had commitments
outstanding to extend credit at prevailing market rates approximating
$100,000 and $104,000. These commitments generally require the customers
to maintain certain credit standards. The amount of collateral obtained,
if deemed necessary by Horizon upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include accounts receivable, inventory, property and equipment,
and income producing commercial properties.
Management conducts regular reviews of these commitments on an individual
customer basis, and the results are considered in assessing the adequacy
of Horizon's allowance for loan losses.
- --------------------------------------------------------------------------------
15. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
Cash $ 2,476 $ 820
Investment in subsidiary banks 116,188 104,145
Investment securities 1,024 1,016
Premises and equipment 1,228 699
Receivable from consolidated subsidiary banks 232 625
Other assets 2,344 2,142
----------------------------
Total assets $123,492 $109,447
============================
Liabilities $ 9,470 $ 36
Shareholders' equity 114,022 109,411
----------------------------
Total liabilities and shareholders' equity $123,492 $109,447
============================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary banks $16,921 $ 8,164 $ 6,858
Interest income on investment securities 63 67 49
Operating expenses (1,791) (2,290) (1,430)
--------------------------------------
Income before income tax and (excess dividends) equity in undistributed
earnings of subsidiary banks 15,193 5,941 5,477
Income tax benefit 380 704 449
--------------------------------------
Income before (excess dividends) equity in undistributed
earnings of subsidiary banks 15,573 6,645 5,926
(Excess dividends) equity in undistributed earnings of subsidiary banks (1,746) 4,506 5,556
--------------------------------------
Net income $13,827 $11,151 $11,482
======================================
</TABLE>
47
<PAGE> 37
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 13,827 $ 11,151 $ 11,482
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 264 602 477
Excess dividends (equity in undistributed earnings) of subsidiary
banks 1,746 (4,506) (5,556)
Decrease (increase) in receivables from consolidated subsidiary
banks 2,489 (625) 157
(Increase) in other assets (105) (810) (542)
Increase (decrease) in other liabilities 2,430 (223) (468)
--------------------------------------
Net cash provided by operating activities 20,651 5,589 5,550
Investing activities:
Purchase of institution (15,447) -- --
Purchases of premises and equipment (890) (162) (1,196)
Maturities of investment securities 162 250 --
Sales of investment securities -- 149 --
Purchases of investment securities (151) (376) (602)
--------------------------------------
Net cash used in investing activities (16,326) (139) (1,798)
Financing activities:
Cash dividends paid (6,935) (5,213) (4,053)
Proceeds from long-term borrowings 7,000 -- --
Acquisition of treasury shares (2,763) -- (175)
Cash received in stock transactions, net of cash paid 29 14 --
--------------------------------------
Net cash used in financing activities (2,669) (5,199) (4,228)
--------------------------------------
Net increase (decrease) in cash 1,656 251 (476)
Cash at beginning of year 820 569 1,045
--------------------------------------
Cash at end of year $ 2,476 $ 820 $ 569
======================================
</TABLE>
- --------------------------------------------------------------------------------
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Fair value information about financial instruments for which it is practicable
to estimate that value are based upon quoted market prices, or if not available,
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
Certain financial instruments and all nonfinancial instruments are excluded from
this presentation. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of Horizon.
The following methods and assumptions were used by Horizon in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts for cash and cash equivalents
approximate their fair value.
Investment Securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market values of comparable instruments.
Loans: The fair values of fixed rate commercial, real estate, and consumer loans
are estimated using discounted cash flow analysis at interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness. For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are deemed to approximate
carrying values.
48
<PAGE> 38
Accrued Interest: The carrying value of accrued interest approximates its fair
value.
Deposits: The fair value of demand deposits (i.e. interest and noninterest
checking, passbook savings, and certain types of money market accounts) is, by
definition, equal to their carrying amounts. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings: The carrying amounts for short-term borrowings
approximate their fair values.
Commitments: The fair values of commitments (standby letters of credit and loan
commitments) are estimated based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standing. The estimated fair value of these
commitments approximates their carrying value. The estimated fair values of the
Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 45,297 $ 45,297 $ 38,958 $ 38,958
Investment securities 215,418 216,635 248,664 249,277
Loans 717,722 721,177 624,377 625,504
Financial liabilities:
Deposits 841,307 846,858 797,996 800,480
Short -term borrowings 42,642 42,642 29,154 29,154
Long -term borrowings 7,102 7,102 -- --
</TABLE>
49
<PAGE> 39
- --------------------------------------------------------------------------------
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $18,235 $18,241 $19,516 $20,378
Interest expense 7,306 7,319 7,850 8,846
Net interest income 10,929 10,922 11,666 11,532
Provision for loan losses 700 400 409 893
Securities losses, net (38) 2 4 14
Net income 3,242 3,512 3,527 3,546
Basic earnings per share 0.35 0.38 0.38 0.39
Diluted earnings per share 0.35 0.38 0.38 0.38
Average common shares outstanding:
Basic 9,295 9,283 9,245 9,205
Diluted 9,310 9,305 9,277 9,235
</TABLE>
<TABLE>
<CAPTION>
1996
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $18,146 $18,305 $18,626 $18,562
Interest expense 7,305 7,264 7,367 7,334
Net interest income 10,841 11,041 11,259 11,228
Provision for loan losses 716 785 727 1,106
Securities losses, net (1) (88) -- 10
Net income 2,833 2,598 2,751 2,969
Basic earnings per share 0.30 0.28 0.30 0.32
Diluted earnings per share 0.30 0.28 0.30 0.32
Average common shares outstanding:
Basic 9,296 9,296 9,296 9,297
Diluted 9,309 9,308 9,307 9,306
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share.
50
- --------------------------------------------------------------------------------
18. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On August 7, 1998, Horizon Bancorp, Inc., a West Virginia corporation
("Horizon"), entered into an Agreement and Plan of Reorganization with City
Holding Company, a West Virginia corporation ("City Holding"), for a tax-free
merger of the two companies under which each outstanding share of common stock,
par value $1.00 per share, of Horizon ("Horizon Common Stock") would be
converted into the number of shares of common stock, par value $2.50 per share,
of City Holding ("City Holding Common Stock"). Under the agreement, the exchange
ratio is determined by dividing $45.00 per share of Horizon Common Stock (the
"Common Stock Price Per Share") by the average closing price of the City Holding
Common Stock as reported on the Nasdaq National Market for each of the 10
trading days ending on the 10th day prior to the day of the effective time of
the merger between Horizon and City Holding (the "Average Close Price"), which
quotient will be rounded to the nearest one-one thousandth (the "Exchange
Ratio"); provided that if the Average Close Price is $44.50 or greater, then the
Exchange Ratio shall be 1.011 and if the Average Close Price is $40.50 or less,
then the Exchange Ratio shall be 1.111.
EXHIBIT 99.D
- --------------------------------------------------------------------------------
Management's Discussion & Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion is provided to assist readers of the consolidated
financial statements in understanding the operating performance of Horizon
Bancorp, Inc. (Horizon). For a more complete understanding, reference is made to
the consolidated financial statements, notes to the consolidated financial
statements and other information presented elsewhere in this report.
Horizon Bancorp, Inc. is a multi-bank holding company headquartered in Beckley,
West Virginia. Its banking subsidiaries are Bank of Raleigh, First National Bank
in Marlinton, Greenbrier Valley National Bank, National Bank of Summers of
Hinton and The Twentieth Street Bank. Horizon's subsidiaries engage in community
banking activities which provide financial and trust services to individuals and
commercial customers primarily in Cabell, Fayette, Greenbrier, Lincoln,
Pocahontas, Raleigh, Summers, and Wayne counties of West Virginia.
Throughout the following discussion, dollars are expressed in thousands, except
per share data.
<TABLE>
<CAPTION>
TABLE 1
FIVE-YEAR SELECTED FINANCIAL SUMMARY
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 76,370 $ 73,639 $ 70,618 $ 62,231 $ 61,029
Interest expense 31,321 29,270 27,600 21,689 23,189
Net interest income 45,049 44,369 43,018 40,542 37,840
Provision for loan losses 2,402 3,334 2,505 2,264 2,337
Noninterest income 5,897 5,350 4,997 3,857 4,176
Noninterest expense 27,229 29,084 28,021 27,161 25,838
Provision for income taxes 7,488 6,150 6,007 4,849 4,345
Net income 13,827 11,151 11,482 10,125 9,496
PER SHARE OF COMMON STOCK (1):
Earnings per share- Basic $ 1.49 $ 1.20 $ 1.23 $ 1.09 $ 1.02
Earnings per share- Diluted $ 1.49 $ 1.20 $ 1.23 $ 1.09 $ 1.02
Dividends declared 0.75 0.62 0.53 0.49 0.47
Book value 12.38 11.76 11.23 9.98 9.56
Weighted average shares outstanding - Basic 9,254 9,296 9,298 9,306 9,306
Weighted average shares outstanding - Diluted 9,278 9,308 9,301 9,306 9,306
AVERAGE BALANCE SHEET SUMMARY:
Total loans $ 669,467 $621,227 $597,857 $552,202 $509,008
Investment securities 230,123 253,307 242,281 252,023 275,019
Total assets 967,200 942,448 917,008 870,779 854,794
Deposits 805,834 803,824 787,803 751,773 742,729
Equity 111,801 105,793 98,890 90,873 85,966
BALANCES AT YEAR-END:
Total assets $1,020,281 $947,068 $942,902 $882,606 $864,017
Total loans 728,239 633,984 620,570 582,206 531,026
Investment securities 215,418 248,664 256,202 237,266 270,009
Earning assets 957,692 885,103 881,447 824,822 813,683
Deposits 841,307 797,996 805,581 762,619 748,798
Shareholders' equity 114,022 109,411 104,383 92,892 88,943
KEY FINANCIAL RATIOS:
Average equity to average assets 11.56% 11.23% 10.78% 10.44% 10.06%
Return on average assets 1.43% 1.18% 1.25% 1.16% 1.11%
Return on average equity 12.37% 10.54% 11.61% 11.14% 11.05%
Efficiency ratio 53.45% 58.50% 58.36% 61.17% 61.50%
Dividends declared as a percent of net income 50.34% 51.67% 43.09% 44.95% 46.08%
Average total loans to average deposits 83.08% 77.28% 75.89% 73.45% 68.53%
ASSET QUALITY:
Nonperforming loans to total loans 1.01% 1.13% 1.26% 1.01% 1.81%
Nonperforming assets to total assets 0.78% 0.81% 0.89% 0.79% 1.23%
Allowance for loan losses to nonperforming loans 143.40% 133.54% 109.27% 138.75% 75.93%
Allowance for loan losses as a percent of total loans 1.44% 1.52% 1.37% 1.40% 1.37%
</TABLE>
(1) Earnings per share for years prior to 1997 have been restated to comply
with Statement of Financial Standards No. 128, Earnings Per Share.
15
<PAGE> 5
EARNINGS SUMMARY
Horizon earned $13,827 for the year ended December 31, 1997, as compared to
$11,151 and $11,482 for the years ended December 31, 1996 and 1995,
respectively. Basic and diluted earnings per share were $1.49 in 1997, an
increase of 24.2% from the $1.20 earned in 1996, following a 2.4% decrease in
1996 from the $1.23 earned in 1995. The increase in 1997 earnings is
characterized by enhanced revenue streams, controlled expenses, a reduction in
the provision for loan losses, and the absence of the nonrecurring acquisition
related charges incurred in 1996.
DILUTED EARNINGS PER SHARE
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
$1.02 $1.09 $1.23 $1.20 $1.49
Return on average assets (ROA) measures how effectively Horizon uses its assets
to produce net income while return on average equity (ROE) measures income
earned compared with the amount of shareholders' investment in Horizon. For the
year ended December 31, 1997, Horizon's ROA improved to 1.43%, compared to 1.18%
and 1.25% for the years ended December 31, 1996 and 1995. For the year ended
December 31, 1997, Horizon's ROE also improved to 12.37%, compared to 10.54% and
11.61% for the years ended December 31, 1996 and 1995. ROA and ROE both
increased in 1997 due to higher net income and a growing balance sheet,
exclusive of acquisition-related nonrecurring charges of $1,230 incurred in
1996. ROA was 1.31% and ROE was 11.70% in 1996, up 4.8% and 0.8%, respectively
when compared to 1995.
Management is not aware of any trends, events or uncertainties that will affect
the results of operations. There are no regulatory recommendations, which if
implemented, would negatively impact the results of Horizon.
RETURN ON AVERAGE ASSETS
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
1.11% 1.16% 1.25% 1.18% 1.43%
RETURN ON AVERAGE EQUITY
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
11.05% 11.14% 11.61% 10.54% 12.37%
16
<PAGE> 6
NET INTEREST INCOME
Interest income generated by earning assets less interest expense incurred to
fund the earning assets or net interest income is Horizon's largest component of
earnings. Net interest income is influenced by the volume and relative yield on
earning assets and cost of interest bearing liabilities and the relative
sensitivity of such assets and liabilities to changes in interest rates.
Interest income and net interest income are presented and discussed on a fully
tax-equivalent basis, as indicated in Table 2. The "taxable-equivalent basis"
adjustment has been included in interest income at a tax rate of 35.0% in 1997,
1996 and 1995.
Net interest income was $47,326 in 1997, an increase of 3.0% over 1996
following a 3.4% increase in 1996 from the 1995 level. In 1997, $2,817 of the
increase in interest income was attributable to an increase in the volume of
earning assets while $387 was due to changes in interest rates on those assets.
As a result, total interest income increased by $3,198 in 1997 over 1996. The
increase in volume for 1997 was due primarily to higher lending volume caused by
the favorable economic environment in Horizon's market area. The expense of
funding these assets, interest expense, increased $1,818 in 1997 to $31,088,
primarily due to the introduction of new products and an increase in pricing of
existing products, both due to competitive pressures. In 1996, an increase in
the interest rate environment increased the rate component of total interest
income $657 and interest expense $1,388 over 1995. In 1996, earning asset volume
increased total interest income by $2,519, due primarily to higher lending
volume caused by the favorable economic environment in Horizon's market area.
Likewise, the increasing rate environment in Horizon's market caused depositors
to move funds from savings deposits to certificates of deposit creating a
corresponding increase in interest expense. In addition, a significant increase
of volume from new customers contributed to the increase in interest expense.
On a tax-equivalent basis, net interest margin was strong at 5.2% in 1997, 1996
and 1995. As shown in Table 2, Horizon's net interest margin has remained
virtually unchanged over the past three years. This has been accomplished
through active asset/liability management of core deposits, which tend to
reprice more slowly than interest earning assets.
Average interest earning assets increased $19,189 or 2.2% during 1997 and
$28,101 or 3.3% during 1996. Average interest bearing liabilities increased
$13,740 or 1.9% in 1997 and $8,301 or 1.2% in 1996. Average total loans
increased 7.8% during 1997, compared to an increase of 3.9% during 1996. As
previously noted, these increases are representative of current economic
activity and efforts by management to extend its market share. The 1997 increase
in average total loans has been partially funded through increased average
interest bearing deposits. Horizon has attracted additional certificates of
deposits while holding rates at levels comparable to 1996. Average federal funds
sold have decreased due to Horizon's strong loan demand. The liquidity of
federal funds allows management to quickly utilize these assets to fund loans.
Average short-term borrowings, which are principally repurchase agreements and
federal funds purchased, increased $10,318 or 47.5% in 1997 following an average
balance increase of $1,786 or 9.0% in 1996.
Table 2 summarizes the composition of average interest earning assets and
average interest bearing liabilities, along with the related income or expense
and the weighted average yield or cost of such funds. Table 3 summarizes changes
in interest income and expense by rate and volume.
17
<PAGE> 7
<TABLE>
<CAPTION>
TABLE 2
NET INTEREST MARGIN
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $ 8,130 $ 419 5.2% $ 13,997 $ 810 5.8% $ 20,292 $ 1,157 5.7%
Investment securities:
Taxable(3) 166,727 10,835 6.5 200,584 12,579 6.3 197,495 12,185 6.2
Tax exempt (1) 63,396 4,923 7.8 52,723 4,112 7.8 44,786 3,623 8.1
--------------------------------------------------------------------------------------
Total investment securities 230,123 15,758 6.8 253,307 16,691 6.6 242,281 15,808 6.5
Total loans (1)(2) 669,467 62,237 9.3 621,227 57,715 9.3 597,857 55,075 9.2
--------------------------------------------------------------------------------------
Total earning assets and
interest income 907,720 78,414 8.6 888,531 75,216 8.5 860,430 72,040 8.4
Noninterest earning assets:
Cash and due from banks 33,270 28,372 27,607
Premises and equipment 16,754 16,929 16,321
Other assets 19,802 17,732 21,149
Less: Allowance for loan losses (10,346) (9,116) (8,499)
-------- -------- --------
Total assets $967,200 $942,448 $917,008
======== ======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Demand deposits $133,255 $ 3,810 2.9% $137,227 $ 3,700 2.7% $126,843 $ 3,558 2.8%
Savings deposits 171,628 5,276 3.1 201,723 6,592 3.3 208,899 6,435 3.1
Certificates of deposit 386,704 20,603 5.3 349,215 18,132 5.2 345,908 16,876 4.9
--------------------------------------------------------------------------------------
Total interest bearing
deposits 691,587 29,689 4.3 688,165 28,424 4.1 681,650 26,869 3.9
Short-term borrowings 32,039 1,399 4.4 21,721 846 3.9 19,935 731 3.7
--------------------------------------------------------------------------------------
Total interest bearing
liabilities and
interest expense 723,626 31,088 4.3 709,886 29,270 4.1 701,585 27,600 3.9
-------------- --------------- ----------------
Noninterest bearing liabilities:
Demand deposits 114,247 115,659 106,153
Other 17,526 11,110 10,380
-------- -------- --------
Total liabilities 855,399 836,655 818,118
Shareholders' equity 111,801 105,793 98,890
-------- -------- --------
Total liabilities and
shareholders' equity $967,200 $942,448 $917,008
======== ======== ========
Net interest income $47,326 $45,946 $44,440
======= ======= =======
Spread 4.3% 4.4% 4.5%
==== ===== ======
Net interest margin 5.2% 5.2% 5.2%
==== ===== ======
</TABLE>
(1) Fully taxable equivalent using 35% in 1997 and 1996 and 1995.
(2) Nonaccrual loans are included in average balances.
(3) Average balances of available-for-sale securities are stated at fair value.
18
<PAGE> 8
<TABLE>
<CAPTION>
TABLE 3
RATE/VOLUME ANALYSIS
------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
DUE TO CHANGE IN DUE TO CHANGE IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ (310) $ (81) $ (391) $ (367) $ 20 $ (347)
Securities:
Taxable (2,187) 443 (1,744) 194 200 394
Tax-exempt 829 (18) 811 626 (137) 489
------------------------------------------------------------------
Total investment securities (1,358) 425 (933) 820 63 883
Total loans 4,485 37 4,522 2,066 574 2,640
------------------------------------------------------------------
Total interest income 2,817 381 3,198 2,519 657 3,176
Demand deposits (109) 219 110 276 (134) 142
Savings deposits (942) (374) (1,316) (236) 393 157
Certificates of deposit 1,987 484 2,471 170 1,086 1,256
Short-term borrowings 441 112 553 72 43 115
------------------------------------------------------------------
Total interest expense 1,377 441 1,818 282 1,388 1,670
------------------------------------------------------------------
Net interest income $1,440 $(60) $1,380 $2,237 $ (731) $1,506
==================================================================
</TABLE>
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
NONINTEREST INCOME
Noninterest income has been and will continue to be an important factor in
Horizon's profitability enhancement efforts. Management continually evaluates
ways to increase noninterest income. As shown in Table 4, noninterest income
increased by $547 or 10.2% in 1997 compared to 1996. The 1997 increase reflects
growth of $506 or 14.7% in service charges and fees. Service charges increased
due to higher deposit balances coupled with increased transactions subject to
service charges.
Noninterest income increased in 1996 by $353 or 7.1% due partly to increases in
service charges and fees, higher trust income and growth in other income.
Service charges and fees increased due to higher deposit balances related to
branch purchases from a local bank. Trust income increased due to growth of
trust assets. Other income increased due to gains recognized on the sale of
other real estate owned and increased insurance commissions.
<TABLE>
<CAPTION>
TABLE 4
NONINTEREST INCOME
------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges and fees $3,938 $3,432 $3,256 $2,816 $2,526
Trust income 921 923 887 834 744
Investment securities (losses)gains (18) (79) (131) (533) 87
Other 1,056 1,074 985 740 819
------------------------------------------------------------------
Total $5,897 $5,350 $4,997 $3,857 $4,176
==================================================================
</TABLE>
NONINTEREST EXPENSE
Just as management strives to effect change that will enhance noninterest
income, it continues to evaluate operations to improve efficiency and reduce
operating costs. Noninterest expense decreased $1,855 or 6.4% for the year ended
December 31, 1997 and increased $1,063 or 3.8% for the year ended December 31,
1996.
Salaries and employee benefits decreased $33 or 0.3% during 1997 after an
increase of $311 or 2.5% during 1996. The salary expense remained fairly
consistent from 1996 to 1997 due to nonrecurring severance costs for displaced
employees in 1996 and normal salary increases in 1997. For the year ended
December 31, 1997, net occupancy expense and equipment expense increased $572 or
15.8% compared to 1996. The increase in net occupancy expense is primarily due
to nonrecurring maintenance and repair items. Equipment expense increased as a
result of expenses related to the migration of affiliate banks to Horizon's wide
area network and conversion to a more efficient communication software linking
the company to its outside data processor. Both projects will enhance future
earnings by improving customer service to all locations as well as improving the
efficiency of internal processes. In 1996, net occupancy and equipment expenses
decreased $198 or 5.2%.
19
<PAGE> 9
Outside data processing expense was virtually unchanged in 1997, increasing $73
or 3.7% from 1996. In 1996, outside data processing increased $10 or 0.5% over
1995.
Deposit insurance and assessments remained relatively stable in 1997 and 1996
after the FDIC lowered the premium for insured deposits.
Advertising expense decreased $52 or 8.9% in 1997 from 1996. In 1996,
advertising decreased $173 from 1995. These reductions were due to management's
efforts to control expenses.
Other operating expense decreased $2,499 or 25.0% during 1997 compared to an
increase of $2,088 or 26.4% during 1996. The decreased expenses in 1997 are
partially due to $1.5 million of non-recurring charges related to acquisition
costs in 1996. The remaining decrease is due to management's efforts to control
these expenses.
<TABLE>
<CAPTION>
TABLE 5
NONINTEREST EXPENSE
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $12,845 $12,878 $12,567 $11,941 $11,918
Net occupancy and equipment 4,196 3,624 3,822 3,145 2,832
Outside data processing 2,069 1,996 1,986 1,795 1,582
Federal deposit insurance 95 11 986 1,811 1,851
Advertising 533 585 758 760 712
Other 7,491 9,990 7,902 7,709 6,943
-----------------------------------------------------------------------
Total $27,229 $29,084 $28,021 $27,161 $25,838
=======================================================================
</TABLE>
IMPACT OF YEAR 2000
Management has initiated a Company-wide program to assess the need to modify or
replace all or portions of its information systems to enable the proper
processing of transactions relating to the Year 2000 and beyond. Most of
Horizon's core data and item processing systems, telecommunication systems,
auxiliary and critical support system services are contracted through major
nationally prominent vendors. Primary exposure for Horizon resides in its
dependence upon these third party providers for services. Horizon has initiated
formal communications with all of its significant outside vendors and suppliers
to determine the extent to which Horizon's systems are vulnerable to these third
parties' ability to remediate their own Year 2000 issues. Management anticipates
completing its analysis during 1998 and to be Year 2000 compliant by December
31, 1998. There is no guarantee that the systems of other companies on which
Horizon systems rely will be converted timely and would not have an adverse
effect on Horizon's systems. Until a complete analysis of the various
alternatives available to the Company is completed, an estimate of the total
cost of the Year 2000 project cannot be made. However, management's current
assessment is that the overall cost to Horizon of compliance with Year 2000
issues will be immaterial. The costs of the Year 2000 project and the date on
which Horizon believes it will be Year 2000 compliant are based upon
management's best estimates utilizing numerous assumptions of future events and
third party vendor modifications.
INCOME TAXES
Horizon's effective tax rate is defined as applicable income taxes expressed as
a percentage of income before income taxes. The effective tax rate was 35.1% in
1997, 35.5% in 1996, and 34.3% in 1995. The decrease in the effective tax rate
during 1997 compared to 1996 reflects a decrease in nondeductible acquisition
costs and an increase in tax-exempt interest income. Refer to Note 10 in Notes
to Consolidated Financial Statements for more information concerning income
taxes.
<TABLE>
<CAPTION>
TABLE 6
APPLICABLE INCOME TAXES
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes $21,315 $17,301 $17,489 $14,974 $13,841
Applicable income taxes 7,488 6,150 6,007 4,849 4,345
Effective tax rate 35.1% 35.5% 34.3% 32.4% 31.4%
</TABLE>
QUARTERLY RESULTS
The results of operations for the first three quarters of 1997 have been
disclosed in quarterly reports to shareholders. Note 17 of the Notes to
Consolidated Financial Statements provides summarized, unaudited financial data
on a quarterly basis.
20
<PAGE> 10
For the fourth quarter of 1997, net income totaled $3,546. These results
represented an increase of $577 or 19.4% from the net income of $2,969 in the
fourth quarter of 1996. Diluted earnings per share for the quarter were $0.38,
up 18.8% from $0.32 for the fourth quarter of 1996.
When compared with the fourth quarter of 1996, Horizon's fourth quarter 1997
results reflected higher net interest income, higher noninterest income, and
lower noninterest expense. Net interest income totaled $11,532 in the fourth
quarter of 1997, an increase of $244 or 2.2% from the net interest income total
of $11,228 in the fourth quarter of 1996. These improvements are a result of
management's efforts to enhance revenue streams, control expenses, and maintain
a net interest margin of 5.2%
BALANCE SHEET ANALYSIS
LOANS
Horizon's loan portfolio is its largest earning asset and approximated 71.4% of
total assets at December 31, 1997 and 66.9% at December 31, 1996. Total loans
were $728,239 at December 31, 1997, an increase of $94,255 or 14.9% from the
December 31, 1996 total of $633,984. This follows an increase of $13,414 or 2.2%
in 1996 from December 31, 1995. The loan-to-deposit ratio continued its upward
trend in 1997, ending the year at 86.6%. This ratio was 79.4% and 77.0% at
December 31, 1996 and 1995, respectively.
Commercial loans comprised 31.9% of total loans at December 31, 1997 and 34.5%
at December 31, 1996. Commercial loans have increased $13,362 or 6.1% from
$218,714 at December 31, 1996 to $232,076 at December 31, 1997. Real estate
construction, primarily commercial real estate, loans made up 1.0% of
outstanding loans at December 31, 1997 compared to 1.3% at December 31, 1996.
This percentage remains steady as generally positive economic conditions
continue in Horizon's market area.
Residential real estate loans comprised 37.1% of total loans at December 31,
1997 and 36.0% at December 31, 1996. At December 31, 1997, residential real
estate loans totaled $270,149 and represented an increase of $41,702 or 18.3%
from the previous year-end. Approximately $15.1 million of the increase is due
to an acquisition in 1997. During the twelve months ended December 31, 1996,
residential real estate loans increased $1,071 or 0.5%.
Consumer loans totaled $219,736 at December 31, 1997 or 30.2% of total loans.
This represented an increase of $40,978 or 22.9% from the December 31, 1996
total of $178,758. Consumer loans are borrowings of individuals for automobiles
and household and other personal purposes. The increase is due to the
acquisition of an institution in 1997 adding approximately $4.8 million in
consumer loans as well as overall growth of the bank. At December 31, 1996,
consumer loans decreased $6,039 or 3.3% from December 31, 1995. The primary
reason for the decrease was due to increased competition for consumer loans and
Horizon's reluctance to reduce underwriting standards to book loans. Credit card
loans, included in consumer loans, totaled $15,626 at December 31, 1997. This
represented an increase of $852 or 5.8% from $14,774 at December 31, 1996.
AVERAGE LOANS/AVERAGE DEPOSITS
1993 ....................... 68.53%
1994 ....................... 73.45%
1995 ....................... 75.89%
1996 ....................... 77.28%
1997 ....................... 83.08%
21
<PAGE> 11
<TABLE>
<CAPTION>
TABLE 7
SUMMARY OF LOANS BY TYPE
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $232,076 $218,714 $203,524 $178,798 $164,302
Real estate - construction 6,278 8,065 4,873 7,013 9,266
Real estate - mortgage 270,149 228,447 227,376 226,567 204,778
Consumer loans 225,642 185,099 192,052 174,530 157,894
------------------------------------------------------------------
Gross loans 734,145 640,325 627,825 586,908 536,240
Unearned income (5,906) (6,341) (7,255) (4,702) (5,214)
------------------------------------------------------------------
Total loans 728,239 633,984 620,570 582,206 531,026
Allowance for loan losses (10,517) (9,607) (8,522) (8,153) (7,301)
------------------------------------------------------------------
Net loans $717,722 $624,377 $612,048 $574,053 $523,725
==================================================================
</TABLE>
During the normal course of business, Horizon's subsidiary banks offer certain
financial products to their customers to aid them in meeting their requirements
for liquidity and credit enhancement. These products are accounted for as
contingent liabilities and, accordingly, they are not reflected in the loan
balances until the commitment is funded. These commitments include letters of
credit and lines of credit, which are made under various conditions. See Note 14
of the Notes to Consolidated Financial Statements for additional information.
Horizon's lending policy provides guidelines for personnel to follow in their
lending activities and presents a consistent philosophy for credit decisions.
Horizon's loan policy confines loans to local customers and presents certain
restrictions for making out-of-market loans. Horizon's loan portfolio is
considered diversified within the market areas it serves. No particular group of
loans currently exceeds 10% of total loans.
Maturity ranges of loans are detailed in Table 8. The repayment amounts shown
are reported in the maturity category based on contractual terms. Rollover of
loan balances is not material.
<TABLE>
<CAPTION>
TABLE 8
MATURITY RANGES OF LOANS
------------------------------------------------------------------
YEAR OR AFTER ONE DUE AFTER
LESS THROUGH FIVE FIVE YEARS TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $128,373 $62,289 $ 41,414 $232,076
Real estate - construction 3,828 1,043 1,407 6,278
Real estate - mortgage 37,111 52,726 180,312 270,149
Consumer loans 40,406 152,774 26,556 219,736
------------------------------------------------------------------
Total loans $209,718 $268,832 $249,689 $728,239
==================================================================
</TABLE>
Loans with a predetermined interest rate due after one year $307,914
Loans with a floating interest rate due after one year $210,607
INVESTMENT SECURITIES
At December 31, 1997, investment securities totaled $215,418 and declined
$33,246 or 13.4% from $248,664 at December 31, 1996. From December 31, 1996 to
December 31, 1997, U.S. Treasury and federal agency securities declined $22,287
or 14.4%, obligations of states and political subdivisions decreased $950 or
1.5%, other securities decreased $4,534 or 31.3% and mortgage-backed securities
declined $5,475 or 36.1%. U.S. Treasury and federal agency securities have
traditionally represented a substantial portion of the securities portfolio. At
December 31, 1997, U.S. Treasury and federal agency securities were $132,552 or
61.5% of the portfolio total and at December 31, 1996, comprised $154,839 or
62.3% of total investment securities. The changes in the investment categories
represents Horizon's efforts to maximize interest income from its investment
portfolio.
The investment portfolio decreased $7,538 or 2.9% from December 31, 1995 to
December 31, 1996 to fund loan growth.
Investment securities provide a source of liquidity along with opportunities to
manage the yield on earning assets. They are also used for pledging of public
deposits. The U.S. Treasury and federal agency securities are highly rated and a
portion of this portfolio is frequently used for pledging of public funds or
securities sold under agreements to repurchase.
Securities of states and political subdivisions totaled $63,234 at December 31,
1997, and decreased $950 or 1.5% from the previous year. This follows an
increase of $16,557 or 34.8% from December 31, 1995 to December 31, 1996.
Horizon's investments in
22
<PAGE> 12
municipal securities are primarily limited to publicly issued securities of
municipalities with a rating of A1 or better and unrated general obligation
securities of municipalities in the market area.
<TABLE>
<CAPTION>
TABLE 9
SECURITIES PORTFOLIO
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and federal agencies-AFS $132,552 $154,839 $139,090 $ 73,407 $ --
U.S. Treasury and federal agencies-HTM -- -- 31,057 91,686 195,486
States and political subdivisions-AFS 21,680 21,443 11,481 -- --
States and political subdivisions-HTM 41,554 42,741 36,146 45,775 46,951
Other securities-AFS 9,960 14,494 19,367 4,248 --
Other securities-HTM -- - 100 1,580 7,287
Mortgage-backed securities-AFS 9,672 15,147 18,961 20,508 --
Mortgage-backed securities-HTM -- -- -- 62 20,285
------------------------------------------------------------------
Total $215,418 $248,664 $256,202 $237,266 $270,009
==================================================================
</TABLE>
Horizon's mortgage-backed securities are subject to prepayment risk and market
risk since the mortgages related to these securities can prepay at any time
without penalties. This risk occurs when interest rates decline, causing the
securities to lose value since the term and the income stream of the securities
have shortened due to prepayments. Mortgage-backed securities totaled $9,672 at
December 31, 1997, a decrease of $5,475 or 36.1% from the December 31, 1996
total of $15,147. The decrease was from principal payments received during the
year. All mortgage-backed securities are currently rated as investment grade;
however, changes in market rates could lead to a loss in market value despite
the securities carrying a rating of investment grade. Horizon's portfolio
contains no high-risk mortgage-backed securities such as interest-only or
principal-only securities. No purchases of mortgage-backed securities were made
during 1997 or 1996.
Other than investments in U.S. Treasury and federal agencies securities, no
single investment comprises more than 10% of the portfolio. Horizon's investment
portfolio contains no high-risk securities or securities that could be expected
to change in market value more than traditional debt securities.
At December 31, 1997, 80.7% of Horizon's securities were available-for-sale and
19.3% were held-to-maturity. The unrealized gain on available-for-sale
securities, net of deferred taxes, totaled $1,098 at December 31, 1997. At
December 31, 1996, 82.8% of Horizon's securities were available-for-sale and
17.2% of its securities were held-to-maturity. The unrealized gain on
available-for-sale securities, net of deferred taxes, totaled $645 at December
31, 1996.
<TABLE>
<CAPTION>
TABLE 10
MATURITY OF INVESTMENT SECURITIES
-------------------------------------------------------------------------------------------------
1-5 5-10 AFTER 10 TOTAL
1 YEAR AVG. YEARS AVG. YEARS AVG. YEARS AVG. CARRYING AVG.
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE YIELD
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury-AFS $21,483 6.20% $32,376 6.33% $ -- --% $ -- --% $ 53,859 6.28%
Federal agencies-AFS 12,238 5.81 28,193 6.53 38,262 7.20 -- -- 78,693 6.74
States and political
subdivisions-AFS 214 7.73 7,989 8.19 8,314 7.54 5,163 8.31 21,680 7.96
States and political
subdivisions-HTM 612 8.74 13,332 7.62 21,485 7.61 6,125 8.18 41,554 7.71
Other securities-AFS -- -- 5,727 7.40 2,082 7.10 2,151 6.32 9,960 7.09
Mortgage-backed securities-AFS 318 8.11 2,306 7.11 1,300 6.21 5,748 5.94 9,672 6.33
-------------------------------------------------------------------------------------------------
Total investment securities $34,865 6.14% $89,923 6.38% $71,443 7.14% $19,187 6.56% $215,418 6.61%
=================================================================================================
</TABLE>
DEPOSITS
Horizon offers a diverse range of products to its customers, including interest
bearing and noninterest bearing demand accounts, savings accounts, and
certificates of deposit. Horizon does not actively compete solely on the basis
of market interest rates.
Total deposits increased $43,311 or 5.4% when compared with the December 31,
1996 total of $797,996. The acquisition of Beckley Federal in the third quarter
of 1997 added $31,824 to total deposits. During 1996, total deposits decreased
$7,585 or 1.0%, partially due to the sale of a branch by one of Horizon's
subsidiary banks on October 31, 1996. Deposits involved in this transaction
totaled $4,818.
23
<PAGE> 13
Noninterest bearing deposits totaled $113,415 at December 31, 1997, a decrease
of $6,416 or 5.4% from December 31, 1996. This follows an increase of $3,303
from December 31, 1995 to December 31, 1996. The shift from noninterest bearing
deposits to interest bearing is due to the intense competition for deposits by
bank and nonbank companies as well as customers being more conscious of other
interest bearing options. Horizon's community banking philosophy and resulting
personalized customer service will aid in maintaining its deposit base.
Certificates of deposit in denominations of $100 or more are included in
interest bearing deposits and totaled $77,444 at December 31, 1997. This is an
increase of $12,271 or 18.8% from the December 31, 1996 total of $65,173.
Maturities of certificates of deposit of $100,000 or more are shown in Table 11.
The growth in large denomination certificates of deposit is attributed to
slightly higher rates offered on the certificates of deposit during 1997
compared to the rate paid in 1996. Large denomination certificates of deposit
comprise 9.2% of total deposits at December 31, 1997, compared to 8.2% at
December 31, 1996. Established customers maintain most of the large certificates
of deposit and Horizon manages these relationships to maintain its deposit base.
<TABLE>
<CAPTION>
TABLE 11
MATURITIES OF CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE
-------------------------------------------------------------
AS OF DECEMBER 31
1997 1996 1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months or less $25,750 $23,211 $22,868 $17,610 $16,001
Over three months through six months 15,881 11,885 12,652 11,692 8,519
Over six months through twelve months 20,731 20,459 12,842 9,533 10,230
Over twelve months 15,082 9,618 11,481 7,398 4,046
-------------------------------------------------------------
Total $77,444 $65,173 $59,843 $46,233 $38,796
=============================================================
</TABLE>
BORROWED FUNDS
Short-term borrowings consist of securities sold under agreements to repurchase
and federal funds purchased. Repurchase agreements are used primarily for
customer accommodation and federal funds purchased are used to meet daily
liquidity needs. At December 31, 1997, short-term borrowings totaled $42,642 and
were comprised of $42,142 in securities sold under agreements to repurchase and
$500 in federal funds purchased. This total is compared to $20,464 in securities
sold under agreements to repurchase and $8,690 in federal funds purchased at
December 31, 1996. The average daily balance of short-term borrowings in 1997
was $32,039 at a weighted average rate of 4.4%. In 1996, the average daily
balance of short-term borrowings was $21,721 and $19,935 in 1995.
Refer to Note 8 in Notes to Consolidated Financial Statements for additional
information on short-term borrowings.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $4,611 or 4.2% at December 31, 1997, from
$109,411 at December 31, 1996. The increase was due to the retention of earnings
of $6,892 (net of dividends paid), an increase in unrealized gain on
available-for-sale securities of $453, and the purchase of $2,763 in treasury
shares. A frequent measure of capital adequacy is the primary capital ratio,
which was 11.6% at December 31, 1996 and 11.1% at December 31, 1997. Horizon's
strong capital position enables Horizon to continually pursue acquisitions and
other growth opportunities.
Regulatory agencies have adopted guidelines relating to capital for bank holding
companies. These guidelines require the maintenance of an amount of capital
based upon risk-adjusted assets. Assets with potentially higher risk are
required to have more capital than assets with lower risk. Additionally, banks
and bank holding companies are required to maintain capital to support, on a
risk-adjusted basis, certain off-balance sheet activities such as loan
commitments and securities lending. It is anticipated that the regulatory
agencies will begin considering interest rate risk in assessing capital adequacy
in future reporting periods.
The regulatory capital standards classify capital into two tiers, referred to as
Tier I and Total Capital. Tier I Capital consists of common shareholders' equity
less intangibles and unrealized gain on available-for-sale securities (plus
unrealized loss on available-for-sale securities). Total Capital consists of
Tier I Capital plus the allowance for loan losses limited to 1.25% of
risk-weighted assets. In determining risk-based capital requirements, assets are
assigned risk weights of 0% to 100%, which are determined by the regulatory
assigned levels of credit risk associated with such assets. Off-balance sheet
items are considered in the calculation of risk-adjusted assets through
conversion factors established by the regulators. The minimum standard for Total
Capital, Tier I Capital, and Average Ratio is 8%, 4%, and 4%, respectively.
Horizon's risk-weighted capital ratios significantly exceed the regulatory
minimums and the regulatory standards to be classified as "well capitalized."
Well-capitalized institutions receive the most favorable deposit insurance
premiums. Refer to Note 13 in Notes to Consolidated Financial Statements for
more discussion of regulatory matters.
24
<PAGE> 14
In 1997, dividends paid to shareholders totaled $0.75 per share compared to the
$0.62 paid in 1996. The portion of earnings returned to shareholders in the form
of dividends was 50.3% in 1997 and 51.7% in 1996. Subsidiary banks are expected
to have adequate earnings in future years to fund payment of shareholders'
dividends and internal growth.
ASSET QUALITY
Reported in Table 12 is a five-year comparison of nonperforming assets, which
includes loans not accruing interest, past due loans over 90 days, foreclosed
properties in the process of liquidation and other loans, the terms of which
have been restructured to enable the borrower to repay. Nonperforming assets
were $7,950 or 0.8% of total assets at year-end 1997. While levels of
nonperforming assets are susceptible to fluctuations in the economy, Horizon
works to keep its level of nonperforming assets at the relatively low level as
demonstrated in Table 12.
Loans ninety days past due and accruing interest were 0.45% of total loans at
year-end 1997 compared to 0.59% and 0.52% at year-end 1996 and 1995.
Nonaccrual loans are non earning assets reported in accordance with regulatory
standards or generally accepted accounting principles. They are loans for which,
in the opinion of management, the full collection of principal and interest is
unlikely. Generally, loans, including those in the consumer category, are placed
on nonaccural status when repossession, foreclosure or bankruptcy proceedings
are initiated, financial distress on the part of the borrower becomes known, or
when payments are delinquent over 90 days. If collateral appears sufficient to
prevent loss and insure full collection, an exception to the policy may be made.
Loans may be placed on nonaccrual status prior to becoming ninety days past due
if it is anticipated that interest or any part of principal may not be
collected. For real estate loans, the asset is transferred to "Other Real Estate
Owned" (OREO) upon foreclosure and carried at the lower of the outstanding
balance or the fair market value of the property based upon current appraisals
and other current market trends less estimated selling expenses.
ALLOWANCE FOR LOAN LOSSES/
NONPERFORMING LOANS
ALLOWANCES FOR NONPERFORMING
LOAN LOSSES LOANS
----------- -----
1993 $ 7.3 $ 9.6
1994 $ 8.2 $ 5.9
1995 $ 8.5 $ 7.8
1996 $ 9.6 $ 7.2
1997 $10.5 $ 7.3
The amount of loans not accruing interest increased $577 or 16.6% at December
31, 1997, from the level reported in 1996. At December 31, 1997, these loans
constituted 0.6% of total loans compared to 0.6% and 0.7% at December 31, 1996
and 1995, respectively. The fluctuations from 1995 to 1996 were due primarily to
a few commercial borrowers moving to nonaccrual status in 1995. These loans
migrated to charge-offs in 1996.
Other real estate owned totaled $616 at December 31, 1997, a increase of $182 or
41.9% from $434 at December 31, 1996. This follows a decline of $124 or 22.2%
from 1995 to 1996. Management anticipates no significant difficulty in disposing
of other real estate and believes that no significant losses are inherent in
this nonearning asset category. If a material decline is noted in the value of
tracts of other real estate, write-downs will occur upon receipt of appraisals
or other information, which indicates deterioration in the fair value.
25
<PAGE> 15
<TABLE>
<CAPTION>
TABLE 12
ANALYSIS OF ASSET QUALITY
---------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $4,043 $3,466 $4,556 $3,473 $ 8,397
Loans ninety days past due and accruing interest 3,291 3,728 3,243 2,403 1,219
---------------------------------------------------------
Total nonperforming loans 7,334 7,194 7,799 5,876 9,616
Other real estate owned 616 434 558 1,023 1,050
Insubstance foreclosures -- -- -- 88 --
---------------------------------------------------------
Total nonperforming assets $7,950 $7,628 $8,357 $6,987 $10,666
=========================================================
Nonperforming loans to total loans 1.01% 1.13% 1.26% 1.01% 1.81%
Nonperforming assets to total assets 0.78% 0.81% 0.89% 0.79% 1.23%
Allowance for loan losses to nonperforming loans 143.40% 133.54% 109.27% 138.75% 75.93%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained by management at a level believed
adequate to absorb losses in the loan portfolio. Management reviews the adequacy
of the allowance in a systematic manner on a periodic basis. Factors used when
determining the adequacy of the allowance for loan losses include the trend in
loan growth, general economic conditions, previous loan loss experience and the
collectibility of higher risk loans. The evaluation of the adequacy of the
allowance for loan losses is inherently subjective and requires management to
make assumptions including the amount and timing of future cash flows and
collateral values that affect the determination of the allowance. Actual results
could differ from those estimates.
Horizon maintains an internal loan review system to determine the adequacy of
the allowance for loan losses. Credits classified as higher risk due to dollar
amount or specified qualitative characteristics are reviewed on a periodic basis
to determine potential loss exposure. Reserves resulting from this analysis,
supplemented by historical charge-off analysis for loans not specifically
evaluated are considered allocated reserves and are supplemented by an
unallocated amount. This unallocated amount is determined by analyzing potential
exposure in the loan portfolio and other trends and factors including, but not
limited to, economic conditions and market trends. Management considers the
allowance for loan losses adequate to absorb possible losses from loans.
At December 31, 1997, the allowance for loan losses was $10,517 or 1.44% of
total year-end loans compared to 1.52% at December 31, 1996 and 1.37% at
December 31, 1995. These fluctuations result from changes in the underlying
quantitative and qualitative factors considered by management in evaluating the
adequacy of the allowance. A summary of the allowance for loan losses allocated
by type of loan and a detailed history of the allowance for loan losses,
illustrating charge-offs and recoveries by loan type and the annual provision
for loan losses over the past five years are included in Tables 13 and 14.
The allocation in Table 13 is based on estimates and subjective judgments and is
not necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
<TABLE>
<CAPTION>
TABLE 13
ALLOCATION OF THE ALLOWANCE FOR
LOAN LOSSES BY LOAN TYPE
--------------------------------------------------------------------------------------------------------
DECEMBER 31
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 4,732 33% $4,318 35% $3,600 33% $2,960 30% $3,353 31%
Real estate - construction 97 1% 200 1% 328 1% 507 1% 498 2%
Real estate - residential 912 35% 1,337 36% 1,350 36% 1,337 39% 1,296 38%
Consumer loans 3,373 31% 3,145 28% 2,639 30% 2,651 30% 1,784 29%
Unallocated 1,403 -- 607 -- 605 -- 698 -- 370 --
--------------------------------------------------------------------------------------------------------
Total $10,517 100% $9,607 100% $8,522 100% $8,153 100% $7,301 100%
========================================================================================================
</TABLE>
The provision for loan losses in 1997 was $2,402, down from the $3,334 provision
in 1996 and the $2,505 provision in 1995. During the fourth quarter of 1997
Horizon increased its provision for loan losses by approximately $500 for
potential exposure on indirect
26
<PAGE> 16
loans made by two of its subsidiary banks. The banks are in the process of
obtaining additional collateral and no additional provision is anticipated for
these credits. Management feels the provision is adequate to maintain the
allowance at the current level which is supported by Horizon's internal
monitoring system.
PROVISION FOR LOAN LOSSES/
NET CHARGE-OFFS
PROVISION FOR
LOAN LOSSES NET CHARGE-OFFS
----------- ---------------
1993 $2.3 $1.4
1994 $2.3 $1.4
1995 $2.5 $2.1
1996 $3.3 $2.3
1997 $2.4 $1.8
Net charge-offs in 1997 decreased $444 or 19.7% from 1996. This increase follows
an increase of $113 or 5.3% in 1996 from 1995 net charge-offs. Net charge-offs
as a percentage of average total loans decreased to 0.3% in 1997 as compared to
0.4% in 1996 and 1995. Although the dollar amount of net charge-offs has
remained reasonably low, charge-offs could increase in the coming months due to
the increase in the total dollar amount of loans. These factors were considered
in determining the adequacy of the allowance for loan losses which, at December
31, 1997, was sufficient to absorb nearly 5.8 times the amount of net
charge-offs experienced during 1997.
Management is not aware of any loans in which possible credit problems of the
borrowers cause doubt as to repayment ability. In addition, management is not
aware of any potential problem loans that have not been considered in the
determination of the adequacy of the allowance for loan losses.
<TABLE>
<CAPTION>
TABLE 14
ALLOWANCE FOR LOAN LOSSES
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $9,607 $8,522 $8,153 $7,301 $6,410
Allowance of acquired institution 309 -- -- -- --
Provision for loan losses 2,402 3,334 2,505 2,264 2,337
Loans charged-off:
Commercial 707 1,432 1,039 579 1,158
Real estate 122 61 89 191 461
Revolving credit 15 414 214 188 41
Other consumer 3,009 1,729 1,447 1,122 942
-----------------------------------------------------------------
Total 3,853 3,636 2,789 2,080 2,602
Recoveries:
Commercial 1,213 775 101 199 706
Real estate 63 25 22 38 102
Revolving credit 8 59 42 23 8
Other consumer 768 528 488 408 340
-----------------------------------------------------------------
Total 2,052 1,387 653 668 1,156
-----------------------------------------------------------------
Net charge-offs 1,801 2,249 2,136 1,412 1,446
-----------------------------------------------------------------
Balance at year end $10,517 $9,607 $8,522 $8,153 $7,301
=================================================================
Percentage of net charge-offs to average loans 0.27% 0.36% 0.36% 0.26% 0.28%
Percentage of allowance for loan losses to total loans 1.44% 1.52% 1.37% 1.40% 1.37%
Earnings coverage of net charge-offs 7.66X 4.96X 5.38X 7.17X 6.57X
</TABLE>
27
<PAGE> 17
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to maintain sufficient
liquidity to meet funding requirements of customers and achieve stability in net
interest income through various market rate and economic cycles. A major
contributor to accomplishment of this goal is maintaining a stable base of core
deposits and other interest bearing funds. Other factors, which help to maintain
liquidity, include an adequate amount of readily marketable assets and a
diversified customer base in the market area. Adequate earnings and capital also
enhance liquidity.
Horizon's interest rate risk management process identifies areas of interest
rate risk in various interest rate scenarios. Management then utilizes the
information to assess the earnings potential in various interest rate
environments, make timely pricing decisions, and provide cost effective
oversight.
Rate sensitive assets and liabilities are those which can be repriced to
prevailing market rates within a short time, generally one year. Management
places emphasis on monitoring the rate sensitivity of earning assets and
interest bearing liabilities within the one-year time period. Table 15
illustrates the rate sensitivity position of Horizon within the one-year time
period at December 31, 1997. Readers are reminded that this is a static analysis
of the position at a particular point in time. Actual results may vary from the
position detailed in Table 15. While Table 15 depicts repricing opportunities,
Table 16 portrays expected maturities.
Marketable and maturing securities have historically been a primary source of
funds to meet customers' liquidity needs. At December 31, 1997, approximately
16% of the securities portfolio matures or reprices within one year. At December
31, 1997, all of the securities held were rated as investment quality and 80.5%
of the portfolio was classified as available-for-sale and could be sold to
satisfy liquidity requirements, if needed. Subsidiary banks also invest excess
funds into overnight instruments known as federal funds sold with correspondent
banks and these averaged $8,130 during 1997.
Two subsidiary banks of Horizon are members of the Federal Home Loan Bank of
Pittsburgh and formal lines of credit have been established for borrowing up to
$131,000, if the need arises. Refer to Note 8 of the Consolidated Financial
Statements for additional information on the relationship with the Federal Home
Loan Bank of Pittsburgh.
Table 16 shows that Horizon has a large amount of interest bearing deposits that
reprice within one year, primarily savings deposits, money market deposits, and
interest bearing demand deposits. Many of these deposit accounts are considered
stable and have traditionally not been subject to fluctuations in market rates
offered.
Another area of consideration in the rate sensitivity area is the fact that at
December 31, 1997, $9,672 in mortgage-backed securities was held in the
portfolio. Mortgage-backed securities have maturity and cash flow tendencies
that vary with the level of market interest rates. Earning assets of this nature
show amounts in time categories greater than one year; however, part of these
balances may be subject to repricing within one year because refinancing
activity may impact the actual cash flows from these instruments.
Horizon's cash and cash equivalents, defined as cash and due from banks and
federal funds sold, is a product of its operating, investing, and financing
activities. Cash provided by operating activities increased by 28.7% in 1997
after decreasing by 14.3% in 1996. These increases and decreases are due
primarily to changes in other assets and liabilities. In 1997, net cash was
provided by financing activities due to the increase in deposits, long and
short-term borrowings. In 1996, net cash was used in financing activities due to
the slight decrease in deposits. In 1995, net cash was provided by financing
activities due to significant increases in deposits and the sale of a branch.
Management of liquidity involves meeting the potential funding needs of loan and
deposit customers and any unexpected cash requirements. Interest rate
sensitivity management seeks to maintain or increase net interest income while
reducing exposure to movements in interest rates. Horizon's Asset/Liability
Committee formulates liquidity strategies and seeks to maintain a proper mix of
interest sensitive assets and liabilities while achieving an interest margin
that is consistent with the risk involved.
Horizon's goal is to minimize volatility in net interest income. As detailed in
Table 15, the one-year cumulative interest sensitivity gap is (60.99)% at
December 31, 1997. The liability sensitive gap is a result of assuming that
interest bearing demand deposits, money market deposits, and savings deposits
will reprice in the one-to-three month sensitivity timeframe. These deposits
total $311,395, however, a majority is considered stable and not subject to
movement due to rate fluctuations.
Monthly reports are prepared for the net interest margin, maturities of assets
and liabilities and projected earnings. A primary function of the
Asset/Liability Committee is to review the various reports and to coordinate
interest rates and asset/liability maturities at the subsidiary banks. Hedging
is not used; interest rates are set at terms to favorably impact the income
projection and may not necessarily correspond to prevailing market rates.
Management is not aware of any trends, events, or uncertainties, either
favorable or unfavorable, which are likely to affect Horizon's liquidity.
Currently, there are no recommendations from regulators concerning liquidity or
rate sensitivity that, if implemented, would have a material effect on Horizon.
28
<PAGE> 18
<TABLE>
<CAPTION>
TABLE 15
INTEREST SENSITIVITY ANALYSIS
------------------------------------------------------------------
DECEMBER 31, 1997
------------------------------------------------------------------
1-3 3-6 OVER 6 TOTAL OVER
MONTHS MONTHS MONTHS ONE YEAR ONE YEAR
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $ 211,879 $ 44,377 $ 87,868 $ 344,124 $613,566
Liabilities $ 457,886 $ 94,469 $ 102,896 $ 655,251 $122,385
Cumulative Gap $(246,007) $(296,099) $(311,127) $(311,127) $491,181
Ratio of interest sensitive assets to interest sensitive
liabilities 46.27% 46.98% 85.39% 52.52%
Ratio of one year cumulative gap to total assets on
December 31, 1997 (60.99)%
</TABLE>
The following table provides information about Horizon's financial instruments
used for purposes other than trading that are sensitive to changes in interest
rates. 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 Horizon's historical experience of the
impact of interest rate fluctuations on the prepayment of residential and home
equity loans and mortgage-backed securities. For core deposits (e.g., DDA,
interest checking, savings and money market deposits) that have no contractual
maturity, the table presents principal cash flows and, as applicable, related
weighted average interest rates based on Horizon's historical experience,
management's judgment and statistical analysis, as applicable, concerning their
most likely withdrawal behaviors. Horizon does not consider these financial
instruments materially sensitive to interest rate fluctuations and historically
the balances have remained fairly constant over various economic conditions. The
weighted average interest rates for the various assets and liabilities presented
are actual as of December 31, 1997.
TABLE 16 - MARKET RISK DISCLOSURES
PRINCIPAL AMOUNT MATURING IN:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
DECEMBER 31,
(Dollars in thousands) 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans 51,540 56,994 56,361 58,008 63,281 73,270 359,454 361,130
Average interest rate 9.27% 9.39% 9.98% 9.73% 9.54% 8.90%
Variable interest rate loans 158,178 8,372 9,611 7,437 8,768 176,419 368,785 370,598
Average interest rate 9.48% 6.78% 8.19% 7.56% 7.63% 6.98%
Fixed interest rate securities 30,091 34,435 19,101 13,870 19,175 86,148 202,820 206,078
Average interest rate 6.02% 6.35% 6.47% 5.83% 5.76% 6.08%
Variable interest rate securities 4,463 -- -- -- 100 6,176 10,739 10,557
Average interest rate 4.79% -- -- -- 7.87% 6.85%
Other interest-bearing assets 14,035 -- -- -- -- -- 14,035 14,035
Average interest rate 5.28% -- -- -- -- --
RATE SENSITIVE LIABILITIES:
Non interest-bearing deposits 113,415 -- -- -- -- -- 113,415 113,415
Average interest rate 0.00% -- -- -- -- --
Savings & interest-bearing checking 301,630 -- -- -- -- -- 301,630 301,630
Average interest rate 2.97% -- -- -- -- --
Time-deposits 292,674 63,677 17,118 3,038 49,640 115 426,262 431,813
Average interest rate 5.42% 5.88% 5.76% 5.99% 5.36% 3.14%
Fixed interest rate borrowings 16 16 18 20 20 12 102 102
Average interest rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Variable interest rate borrowings 46,442 800 800 800 800 -- 49,642 49,642
Average interest rate 4.91% 6.85% 6.85% 6.85% 6.85% --
</TABLE>
29
<PAGE>
EFFECTS OF INFLATION
Because Horizon's assets are, for the most part, liquid in nature, they are not
significantly affected by inflation. However, the rate of inflation affects
operating expenses, such as employee salaries and benefits, occupancy and
equipment charges, and other overhead expenses. Horizon attempts to adjust its
charges for services to compensate for increasing costs. As a result, interest
rates have a more significant impact on the Company's performance than the
effect of inflation.
MARKET AND DIVIDEND INFORMATION
During 1994, Horizon's stock became listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol HZWV.
Table 17 summarizes the range of prices of common stock and dividends declared
for each quarter of 1997 and 1996.
<TABLE>
<CAPTION>
TABLE 17
--------------------------------------------------------------------------------------------------
QUARTER STOCK PRICE RANGE DIVIDEND DECLARED PER SHARE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
4th Quarter 1997 $27.00-33.25 $0.24
3rd Quarter 1997 $25.25-34.50 $0.17
2nd Quarter 1997 $23.52-26.75 $0.17
1st Quarter 1997 $19.25-24.50 $0.17
4th Quarter 1996 $19.25-20.75 $0.17
3rd Quarter 1996 $19.25-21.25 $0.15
2nd Quarter 1996 $19.00-22.00 $0.15
1st Quarter 1996 $19.50-22.13 $0.15
</TABLE>
Owners of Horizon common stock receive dividends from available funds when
declared by the Board of Directors of Horizon. The Board of Directors intends to
continue the policy of paying quarterly cash dividends. Future dividends will
depend upon earnings of Horizon and its subsidiaries, their financial condition
and other factors, which include government regulation and policies. Refer to
Note 13 in the consolidated financial statements for restrictions on subsidiary
dividends, the primary source of funds for dividends paid by Horizon to its
shareholders.
During 1996, Horizon instituted a dividend reinvestment plan for its
shareholders. Existing shareholders may elect to have all or a portion of their
quarterly dividends reinvested in Horizon stock at the current market price.
Costs of the dividend reinvestment plan are borne by Horizon.
At March 5, 1998, there were 2,585 holders of record of Horizon common stock.
FORWARD LOOKING INFORMATION
The statements in this 1997 Annual Report, which are not historical fact, are
forward-looking statements that involve risks and uncertainties, including but
not limited to, the interest rate environment, the effects of federal and state
banking laws and regulations, the effect of federal, state, and local tax laws
and regulations, the impact of competition on products and pricing, and other
risks detailed in Horizon's filings with the Securities and Exchange Commission.
There is no assurance that actual results in the future will not differ
significantly from expectations.
30
EXHIBIT (99)(e)
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Horizon Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Horizon Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' 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 did not audit the 1995 consolidated financial statements of
Twentieth Bancorp, Inc. and subsidiary (Twentieth) which statements reflect
total interest income constituting 34% of the related consolidated total. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Twentieth, is based
solely on the report of the other auditors.
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, based on our audits and, for 1995, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Horizon
Bancorp, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated 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.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
February 13, 1998, except for
Note 18, as to which the date
is August 7, 1998
EXHIBIT (99)(f)
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and the
Board of Directors of Twentieth Bancorp, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of
TWENTIETH BANCORP, INC. and its Subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Twentieth Bancorp, Inc. and its Subsidiary as of December 31, 1995 and 1994, and
the results of their consolidated operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ DIAMOND, LEFTWICH, GOHEEN & DUNN
Huntington, West Virginia
February 12, 1996
