<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to________________
Commission file number 0-11672
HORIZON BANCORP, INC.
(Exact name of registrant as specified in its charter)
West Virginia 55-0631939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Park Avenue, Beckley, WV 25802-2803
(Address of principal executive offices) (Zip Code)
(304) 255-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
None
NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $1.00
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 15, 1997, there were 8,155,784 shares of Horizon Bancorp, Inc.
$1 par value common stock held by non-affiliates with an aggregate market value
of $184,247,640.
As of March 15, 1997, there were 9,297,837 shares of Horizon Bancorp, Inc.
$1 par value common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
INCORPORATED INTO
-----------------
<S> <C>
(1) Portions of the Annual Report to Shareholders for the year
ended December 31, 1996 (hereinafter the "1996 Annual Report")..... Parts I, II, & IV
(2) Portions of the Definitive Proxy Statement for Annual Meeting
of Shareholders to be held April 22, 1997, to be filed with the
Securities Exchange Commission (the "Commission") ................. Part III
(3) Form 8-K filed with the Securities & Exchange Commission on
November 4, 1996, announcing the stock split....................... Part IV
</TABLE>
HORIZON BANCORP, INC.
FORM 10K INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Item 1 Business 1
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 6
Part II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 6
Item 6 Selected Financial Data 6
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8 Financial Statements and Supplementary Data 6
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
Part III Item 10 Directors and Executive Officers of the Registrant 6
Item 11 Executive Compensation 6
Item 12 Security Ownership of Certain Beneficial Owners and
Management 6
Item 13 Certain Relationships and Related Transactions 7
Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 7
Signatures...................................................................... 8
Index to Exhibits 9
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE REGISTRANT
The Registrant was incorporated in 1982 under the laws of the State of West
Virginia as a one-bank holding company known as Raleigh Bankshares, Inc. On
January 3, 1984, the Bank of Raleigh became a wholly-owned subsidiary of
Raleigh Bankshares.
Subsequent to 1984, the Board of Directors determined that the name,
Raleigh Bankshares, may have had a constraining effect upon expansion
activities. The shareholders approved an amendment on April 16, 1985, to change
Raleigh Bankshares' name to Horizon Bancorp, Inc. ("Horizon" or "Horizon
Bancorp").
Banking operations are, and are expected to continue to be, Horizon
Bancorp's primary business and major source of revenue. For the most part,
Horizon Bancorp derives its revenues from dividends paid by its subsidiary
banks. The principal role of Horizon Bancorp is to supervise and coordinate the
activities of the subsidiary banks.
Horizon has five operating subsidiaries, Bank of Raleigh ("Raleigh"),
National Bank of Summers of Hinton ("Summers"), Greenbrier Valley National Bank
("Greenbrier"), The First National Bank in Marlinton ("Marlinton") and The
Twentieth Street Bank ("Twentieth" or "Twentieth Street Bank").
Summers was acquired by Horizon on June 1, 1985, through a consolidation
between Summers bank and NBS National Bank, a wholly-owned subsidiary of
Horizon.
On September 19, 1988, Crossroads National Bank, Bradley, West Virginia,
was merged with and into Raleigh. Greenbrier and Marlinton were acquired by
Horizon on March 31, 1993, through a merger between Allegheny Bankshares
Corporation and Horizon Bancorp, Inc. Twentieth was acquired by Horizon on
August 30, 1996, through a merger between Twentieth Bancorp, Inc. and Horizon
Bancorp, Inc.
At December 31, 1996, Horizon had consolidated assets of $947,068,000,
deposits of $797,996,000 and shareholders' equity of $109,411,000.
Raleigh was originally chartered in 1899 as a state banking corporation
with the name "Bank of Raleigh." It has conducted banking operations in
Beckley, West Virginia, continuously since that time. In 1957, Beckley
Industrial Savings and Loan Company merged into Raleigh, with Raleigh surviving
the merger. As described above, Crossroads National Bank, Bradley, West
Virginia, merged with and into Raleigh during 1988, and Crossroads' former
office is operated as a branch of Raleigh.
Summers was incorporated in 1895 as a state banking corporation under the
laws of the State of West Virginia with the name "The Bank of Summers." Summers
opened for business in 1895 and operated as a state bank under the laws of the
State of West Virginia from that date until 1906, when the Bank obtained a
national charter and assumed its present name, "National Bank of Summers of
Hinton."
Greenbrier was incorporated in 1901 as a national banking association with
the name of "First National Bank of Alderson." An Agreement to Consolidate and
Plan of Reorganization dated February 12, 1985, as amended by Amendment dated
October 24, 1985, among Allegheny Bankshares Corporation, Greenbrier Valley
Bank and First National Bank of Alderson ("Agreement; Plan of Reorganization")
was entered into whereby Greenbrier Valley Bank was consolidated with First
National Bank of Alderson and formed a new bank under the charter of First
National Bank of Alderson and the title of Greenbrier Valley National Bank.
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Marlinton was incorporated in 1902 as a national banking association under
the laws of the United States.
Twentieth Street Bank was originally incorporated on September 11, 1905, as
a state bank under the laws of West Virginia, and has operated as such since
that time. In 1983, the Bank became a wholly owned subsidiary of Twentieth
Bancorp, Inc., which was a one-bank holding company. Twentieth Street Bank's
Milton branch was originally a separate corporation (Bank of Milton)
incorporated on September 7, 1904, as a state bank under the laws of West
Virginia and operated as such until being acquired by Twentieth Street Bank on
June 30, 1985. Twentieth Street Bank's West Hamlin branch was originally a
separate corporation (First National Bank of West Hamlin) incorporated on
October 24, 1964, as a national bank. The First National Bank of West Hamlin
was acquired by Twentieth Bancorp, Inc. on December 31, 1984. It continued to
operate as a national bank until January 1, 1990, when its operations became
branches of The Twentieth Street Bank, Inc. In December 1995, Twentieth added a
new full service branch facility in Hamlin, West Virginia on State Route 3
located in Lincoln County.
During 1995, Horizon, through two of its subsidiary banks, purchased
certain assets and assumed certain liabilities of a regional banking company.
Greenbrier Valley National Bank acquired the regional branch office at Fairlea,
Greenbrier County, on March 31, 1995. Bank of Raleigh acquired regional branch
offices located at Beaver and Sophia, Raleigh County, and at Oak Hill in
Fayette County on May 12, 1995. The assets of these offices acquired by Horizon
totaled approximately $21,000,000.
The Board of Directors of Horizon implemented a dividend reinvestment plan
in September 1995 for Horizon's shareholders. The purpose of the plan is to
provide Horizon's shareholders with a convenient means of purchasing additional
shares of common stock of Horizon through the investment of dividends. All
shareholders are eligible to participate in the plan. The plan is voluntary,
and all maintenance and transaction costs are paid by Horizon.
FUTURE ACQUISITIONS AND EXPANSIONS
Horizon has no plans, arrangements or understandings to acquire any
other banking or banking-related businesses at this time.
EMPLOYEES
At the close of 1996, Horizon had 400 full-time equivalent employees.
COMPETITION
Raleigh's primary market area is generally defined as Raleigh County, West
Virginia. At December 31, 1996, there were eight financial institutions
operating in Raleigh County. Total deposits of the commercial banks in Raleigh
County at December 31, 1996, were approximately $673,764,000, and Raleigh
ranked first with 38.04% of the total deposits in Raleigh County. These
institutions include One Valley Bank and United National Bank which are
wholly-owned subsidiaries of state-wide multi-bank holding companies. Raleigh's
largest competitor in the market area reported total deposits of $150,380,000
and the smallest competitor in the market area had total deposits of
$11,873,000.
Five new banks have been chartered in Raleigh County since 1970. In
addition, one federally-chartered savings and loan association has opened since
1980. Total deposits for Raleigh, however, have increased from the December 31,
1995 level of $251,906,000 to a December 31, 1996 level of $256,318,000.
The primary market area of Summers is generally defined as Summers County,
West Virginia. At December 31, 1996, there were two banks operating in Summers
County with total deposits of approximately $117,737,000. Summers had total
deposits of $61,588,000 at December 31, 1996, and the other bank in the market
area had total deposits of approximately $56,149,000 as of that date.
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The primary market area of Greenbrier is generally defined as Greenbrier
County, West Virginia. Greenbrier's market area is served by five financial
institutions. These institutions include One Valley Bank and First State Bank
and Trust, wholly-owned subsidiaries of state-wide multi-bank holding
companies. At December 31, 1996, total deposits at these five financial
institutions were approximately $476,368,000. Greenbrier is the largest of
these five banks with 32.73% of the deposits in Greenbrier County. Greenbrier
had total deposits of $155,939,000 at December 31, 1996, and the other banks
within the market area had total deposits of approximately 67.27% as of that
date.
Marlinton's primary market area is generally defined as Pocahontas County,
West Virginia. There are two commercial banks within Marlinton's market area.
At December 31, 1996, total deposits at these two commercial banks were
approximately $100,293,000, and Marlinton held approximately 50.56% of the
total deposits.
The primary market area of Twentieth is generally defined as Cabell, Wayne
and Lincoln counties of West Virginia. Seven commercial banks and one federal
savings bank are located in Twentieth's market area. At December 31, 1996,
Twentieth had total deposits of $274,229,000, which ranked second in their
area.
Horizon banks are subject to competition from less heavily regulated
entities such as brokerage firms, money market mutual funds, consumer finance
and credit card companies and other financial services companies. For instance,
savings banks, savings and loan associations, credit unions, and issuers of
commercial paper compete for funds and loans. In addition, personal and
corporate trust and investment counseling services are offered by insurance
companies, investment counseling firms and other firms and individuals.
Until 1992, the various banks and bank holding companies operating in West
Virginia were predominantly owned by shareholders in West Virginia and were
financed by operations arising principally in West Virginia. During 1992,
BancOne Corp., the seventh largest bank holding company in the United States at
that time, executed an Agreement with Key Centurion Bancshares, Inc., the
largest bank holding company in the State, which provided for the acquisition
of all of the outstanding stock of Key Centurion. In 1993, Huntington
Bancshares, Incorporated consummated the acquisition of Commerce Banc
Corporation.
In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching
Efficiency Act. Under this Act, absent action to opt out or limit interstate
branching by the West Virginia Legislature, interstate branch banking may occur
after June 1, 1997. The states are permitted: i) to opt into interstate branch
banking prior to June 1, 1997; ii) to opt out of interstate branch banking
prior to that date, iii) to allow only acquisition of branches; iv) to opt into
DE NOVO interstate branch banking; or v) to allow the acquisition of a branch
of a bank without acquiring the bank itself. In 1996, the West Virginia
Legislative opted into interstate branch-banking, with De Novo branching or
acquisition of branches without acquiring a bank on a reciprocal basis,
effective May 31, 1997. The effect of this legislation will likely be
increased competition for West Virginia banks, including the subsidiaries of
Horizon.
SUPERVISION AND REGULATION
Horizon is a bank holding company within the provisions of the Bank Holding
Company Act of 1956, is registered as such and is subject to supervision by the
Board of Governors of the Federal Reserve System ("Federal Reserve"). Horizon
is also a registered bank holding company within the provisions of the West
Virginia Bank Holding Company laws (W.Va. Code 31A-8A-1 et seq.) ("West
Virginia Act"), and is subject to the supervision of the West Virginia Board of
Banking and Financial Institutions ("Board of Banking") and Commissioner of
Banking. The Bank Holding Company Act and the West Virginia Act require Horizon
to secure the prior approval of the Federal Reserve and the Board of Banking
before Horizon acquires ownership or control of more than 5% of the voting
shares or substantially all of the
3
<PAGE> 6
assets of any institution, including another bank. In addition, the West
Virginia Act prohibits a depository institution, including a bank holding
company, from controlling more than 20% of the total deposits of all depository
institutions in West Virginia.
As a bank holding company, Horizon is required to file with the Federal
Reserve and the Commissioner of Banking annual reports and such additional
information as the Federal Reserve may require pursuant to the Bank Holding
Company Act and the Banking Commissioner may require under the West Virginia
Act. The Federal Reserve and the Banking Commissioner may also make
examinations of Horizon and any or all of its subsidiaries. Further, under
Section 106 of the 1970 Amendments to the Bank Holding Act and the regulations
of the Federal Reserve, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or any provision of credit, sale or lease of property or
furnishing of services. In addition, pursuant to the United States Code,
Horizon is considered an "affiliate" of the Banks and, as such, the Banks are
subject to statutory limitations in extending credit to, or investing funds in,
Horizon, and in accepting Horizon's securities or other obligations as
collateral for any advances made by the Banks to any other entity or person.
Horizon is required to register annually with the Commissioner of Banking
of West Virginia ("Commissioner") and to pay a registration fee to the
Commissioner based on the total deposits in the banks with respect to which
Horizon is a bank holding company. The registration fee is limited to ten
dollars per million dollars in deposits rounded off to the nearest million
dollars. Horizon is also under the regulatory control of the Commissioner.
The operations of Raleigh and Twentieth are subject to federal and state
statutes, which apply to state-chartered banks and to non-members of the
Federal Reserve. Raleigh and Twentieth's operations are also subject to
regulations of the Board of Banking, the Federal Reserve and the Federal
Deposit Insurance Corporation ("FDIC").
The primary supervisory authorities of Raleigh and Twentieth are the FDIC
and the Commissioner of Banking. The FDIC and Banking Commissioner regularly
examine such areas as reserves, loans, investments, management practices and
other aspects of Raleigh and Twentieth's operations. Independent of those
examinations, both supervisory authorities also conduct regular examinations of
Raleigh and Twentieth's Trust Department. These examinations are designed for
the protection of Raleigh and Twentieth's depositors and not for its
shareholders. In addition to these regular examinations, Raleigh and Twentieth
must furnish to the FDIC and the Board of Banking quarterly reports containing
full and accurate statements of their affairs.
The operations of Greenbrier, Marlinton and Summers are subject to federal
and state statutes which apply to national banks and to members of the Federal
Reserve. Greenbrier's, Marlinton's and Summers' operations are also subject to
regulations of the FDIC, the Federal Reserve, and the Office of the Comptroller
of the Currency ("Comptroller"). The primary supervisory authority of
Greenbrier, Marlinton and Summers is the Comptroller, which regularly examines
such areas as reserves, loans, investments, management practices, and other
aspects of its affairs.
The Banks are members of the FDIC, and their deposits are insured as
provided by law. Raleigh and Twentieth are members of the Federal Reserve
System and also carry FDIC insurance.
In addition to the effect of general economic conditions, the earnings of
Horizon are affected by the fiscal and monetary policies of the Federal
Reserve, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. The techniques used by the Federal
Reserve include setting the reserve requirements of member and nonmember banks,
establishing interest rates on time and savings deposits and the discount rate
on member bank borrowings, and conducting open market operations in United
States government securities to exercise control over the supply of money and
credit.
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The policies of the Federal Reserve have a direct and indirect effect on
the amount of bank loans and deposits, and the interest rates charged and paid
thereon. While the impact of current economic conditions and the policies of
the Federal Reserve and other regulatory authorities designed to deal with
these conditions upon the future business and earnings of the Banks cannot be
accurately predicted, those policies can materially affect the revenues and
income of commercial banks.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs and effects of compliance with federal, state and local
environmental laws are not expected to have a material effect on Horizon or the
Banks.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Statistical disclosures required by bank holding companies are included in
"Five-Year Selected Financial Summary" on page 5 and in "Management's
Discussion and Analysis of Operations" set forth on pages 5 through 21 of
Horizon's Annual Report to Shareholders for the fiscal year ended December 31,
1996. That information is incorporated herein by reference.
ITEM 2. PROPERTIES
Horizon's principal office is located in the Bank of Raleigh at One Park
Avenue, Beckley, West Virginia. Raleigh has a full-service branch consisting of
the former offices of Crossroads National Bank at the Crossroads Mall, Bradley,
West Virginia. In addition, a full-service branch is located at the corner of
Main and Kanawha Streets, Beckley, West Virginia. During 1995, branches in
Kroger supermarkets were acquired from a regional bank and are located at
Beaver and Sophia, Raleigh County, and at Oak Hill in Fayette County.
The operations of Summers are conducted at its main office of 123 Temple
Street in Hinton, West Virginia and a full-service branch facility at Country
Roads Plaza on Stokes Drive.
Greenbrier's main office is located at 109 South Jefferson Street,
Lewisburg, West Virginia. Greenbrier has four full service branch offices
located in Alderson, Rainelle, Fairlea, and Rupert, West Virginia. During 1995,
a branch in a Kroger supermarket was acquired from a regional bank and is
located at Fairlea.
The principal office of Marlinton is located at 300 Eighth Street,
Marlinton, Pocahontas County, West Virginia.
The operations of Twentieth are conducted at 1900 Third Avenue, Huntington,
West Virginia. Twentieth has four full service branch offices located at Route
60 East, Huntington, Milton, Hamlin and West Hamlin, West Virginia. In
addition, a limited-service facility is located on Fifth Avenue, Huntington,
West Virginia.
Horizon also offers services to its customers at various locations within
the service area through automated teller machines. The automated teller
machines permit customers to make deposits, withdrawals, and loan payments at
these locations, and the banks have joined a regional network.
ITEM 3. LEGAL PROCEEDINGS
Horizon and its banks are involved in various legal proceedings arising in
the normal course of business. It is anticipated that the ultimate resolution
of these proceedings will not have a material adverse effect on the financial
position or operations of Horizon or the banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The section of Management's Discussion and Analysis of Financial Condition
and Results of Operations entitled "Market and Dividend Information" on page 20
of Horizon's 1996 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Table 1, "Five-Year Selected Financial Summary," on page 5 of Horizon's
1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 5 through 20 of Horizon's 1996 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements
included on pages 21 through 39 of Horizon's 1996 Annual Report to Shareholders
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HORIZON
The information set forth in the sections "Management Nominees to the Board
of Directors," "Executive Officers of Horizon" and "Section 16(a) Beneficial
Ownership Reporting Compliance" on pages 3 through 8, pages 9 through 10 and
pages 13 through 14, respectively, of Horizon's definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections "Executive Compensation" on pages 15
through 18 and "Compensation of Directors" on page 8 of Horizon's definitive
Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the section "Security Ownership of Certain
Beneficial Owners and Management" on pages 11 through 13 of Horizon's
definitive Proxy Statement for the 1997 Annual Meeting of Shareholders are
incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the section "Certain Relationships and Related
Transactions and Compensation and Benefits Committee Interlocks and Insider
Participation" on pages 22 through 24 of Horizon's definitive Proxy Statement
for the 1997 Annual Meeting of Shareholders and the information set forth
in Note 4 on page 31 of Horizon's 1996 Annual Report to Shareholders are
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements on pages 23 through 39 of Horizon's 1996 Annual
Report to Shareholders are incorporated herein by reference:
Consolidated balance sheets--December 31, 1996 and 1995
Consolidated statements of income--years ended December 31, 1996, 1995, and
1994
Consolidated statements of shareholders' equity--years ended December 31,
1996, 1995, and 1994
Consolidated statements of cash flows--years ended December 31, 1996, 1995,
and 1994
Notes to consolidated financial statements--December 31, 1996
(a)(2) None.
(a)(3) Exhibits required by item 601 - see listing of exhibits on page 9
(b) Reports on Form 8-K
(c) Exhibits - exhibits for this 10-K begin on page 10
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 25th day of
March, 1997.
HORIZON BANCORP, INC.
By: /s/ FRANK S. HARKINS, JR.
-----------------------------
Frank S. Harkins, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 25th day of March, 1997.
<TABLE>
<CAPTION>
NAME TITLE
----------------------- -----------------------------------------
<S> <C>
/s/ FRANK S. HARKINS, JR. Chairman of the Board and Chief Executive
------------------------- Officer
Frank S. Harkins, Jr. (Principal Executive Officer)
/s/ PHILIP L. MCLAUGHLIN President and Chief Operating Officer
-------------------------
Philip L. McLaughlin
/s/ C. DUANE BLANKENSHIP Vice President and Chief Financial Officer
------------------------- (Principal Accounting Officer)
C. Duane Blankenship
/s/ DAVID W. HAMBRICK Executive Vice President
-------------------------
David W. Hambrick
/s/ E. M. PAYNE III Secretary
-------------------------
E. M. Payne III
/s/ JOHN M. ALDERSON IV Director
-------------------------
John M. Alderson IV
/s/ JOSEPH M. BLANKENSHIP Director
-------------------------
Joseph M. Blankenship
/s/ W. H. FILE III Director
-------------------------
W. H. File III
/s/ ALBERT M. TIECHE, JR. Director
-------------------------
Albert M. Tieche, Jr.
/s/ B.C. MCGINNIS, III Executive Vice President
-------------------------
B.C. McGinnis, III
/s/ WILLIAM C. DOLIN Director
-------------------------
William C. Dolin
/s/ R. T. ROGERS Director
-------------------------
R. T. Rogers
/s/ TRACY W. HYLTON II Director
-------------------------
Tracy W. Hylton II
/s/ JACK G. BAZEMORE Director
-------------------------
Jack G. Bazemore
/s/ ROBERT L. KOSNOSKI Director
-------------------------
Robert L. Kosnoski
/s/ THOMAS E. LILLY Director
-------------------------
Thomas E. Lilly
/s/ CLARENCE E. MARTIN Director
-------------------------
Clarence E. Martin
/s/ CAROLYN H. MCCULLOCH Director
-------------------------
Carolyn H. McCulloch
/s/ JACK MCGINNIS Director
-------------------------
Jack McGinnis
/s/ THOMAS L. MCGINNIS Director
-------------------------
Thomas L. McGinnis
/s/ HARPER W. NELSON Director
-------------------------
Harper W. Nelson
/s/ RODNEY H. PACK Director
-------------------------
Rodney H. Pack
/s/ SHARON H. ROWE Director
-------------------------
Sharon H. Rowe
/s/ PHILLIP W. CAIN Director
-------------------------
Phillip W. Cain
/s/ JAMES E. SONGER Director
-------------------------
James E. Songer
</TABLE>
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ITEM 14 - Index to Exhibits
<TABLE>
<CAPTION>
Exhibit Page Reference
<S> <C> <C>
(3) (i) Articles of Incorporation 10
(ii) By-Laws
(b) Reports on form 8-K filed during the last quarter of 1996:
Form 8-K dated November 4, 1996 11
(11) Statement Re: Computation of Earnings Per Share 18
(12) Statements re: Computation of Ratios 19
(13) Horizon Bancorp, Inc. 1996 Annual Report 20
(21) Subsidiaries of Registrant 62
(23.1) Consent of Ernst & Young LLP 63
(23.2) Consent of Diamond, Leftwich, Goheen & Dunn 64
(27) Financial Data Schedule 65
(99) Report of Diamond, Leftwich Goheen & Dunn 66
</TABLE>
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EXHIBIT (3)(i) AND (3)(ii) - ARTICLES OF INCORPORATION AND BY-LAWS
Exhibits 3(a) and (c) were filed as part of Horizon's S-14 Registration
Statement, Registration No. 2-287946, on October 4, 1983 and are
incorporated herein by reference. Exhibit 3(b) was filed as part of
Horizon's 1983 Annual Report on Form 10-K and is incorporated herein by
reference. Exhibit 3(b)(ii) was filed as part of Horizon's 1985 Annual
Report on Form 10-K and is incorporated herein by reference.
<PAGE> 1
EXHIBIT 3(b)
Exhibit (b) - Reports on Form 8-K filed during the last quarter of 1996: Form
8-K dated November 4, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: Commission File Number:
NOVEMBER 4, 1996 0-11672
HORIZON BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0631939
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE PARK AVENUE, BECKLEY, WV 25801
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(304) 255-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
(This report contains (1) page)
<PAGE> 2
ITEM 5. OTHER EVENTS
Attached to this report on Form 8-K as Exhibit 20, and incorporated herein by
reference, is a press release of Horizon Bancorp, Inc. issued on October 25,
1996, announcing a two-for-one stock split effected in the form of a 100% stock
dividend and fourth quarter cash dividend payable on December 15, 1996. This
release also presented earnings for the three and nine month periods ended
September 30, 1996 and 1995, adjusted for the effect of the split.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a). Financial statements of businesses acquired.
Audited financial statements of Twentieth as of December 31, 1995 and 1994 and
for the three years in the period ended December 31, 1995, have been previously
filed with the Commission with Twentieth's Form 10-K for the year ended
December 31, 1995, which was incorporated by reference into Horizon's Form S-4,
Registration No. 333-02365.
(b). Pro forma financial information.
Pro forma condensed consolidated financial statements at March 31, 1996 and
1995 and for the three month periods then ended and at December 31, 1995 and
1994 and for the three years in the period ended December 31, 1995 are included
in Horizon's Form S-4, Registration No. 333-02365.
Pro forma financial information and financial statements at June 30, 1996 and
for the six month periods ended June 30, 1996 and 1995 are attached to this
filing as Exhibit 99.
(c). Exhibits.
20. Press release dated October 25, 1996
99. Pro forma financial statements at June 30, 1996 and for the six
month periods ended June 30, 1996 and 1995
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.
HORIZON BANCORP, INC.
By: /s/ FRANK S. HARKINS, JR.
----------------------------------
Frank S. Harkins, Jr.
Chairman of the Board and CEO
Date: November 4, 1996
<PAGE> 3
NEWS RELEASE
FOR RELEASE: OCTOBER 25, 1996
Contact: C. Duane Blankenship, CFO
(304) 255-7310
HORIZON BANCORP, INC.
HORIZON BANCORP ANNOUNCES STOCK SPLIT AND INCREASE IN DIVIDEND
Frank S. Harkins, Jr., Chairman and CEO of Horizon Bancorp, Inc.
(NASDAQ:HZWV), announced that the board of directors has approved a two-for-one
stock split effected in the form of a dividend and declared a fourth quarter
cash dividend of $0.17 per share, both of which are payable December 15, 1996,
to shareholders of record on December 1, 1996. The cash dividend will be paid
on all outstanding shares including those issued as a result of the split.
The dividend rate for the year ending December 31, 1996, represents an
increase of 18.1% over the dividend rate for 1995.
Below is summarized financial information for the nine and three
months ended September 30, 1996 and 1995. All information has been restated to
reflect the increased number of common shares outstanding as a result of the
split, and to reflect the acquisition of Twentieth Bancorp on August 30, 1996.
The acquisition was accounted for under the pooling of interests method of
accounting and accordingly financial information of Horizon and Twentieth has
been presented as if the companies had always been combined.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE
ENDED SEPTEMBER 30 MONTHS ENDED
SEPTEMBER 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $18,520 $18,124 $54,695 $51,898
Interest expense 7,261 7,320 21,554 19,910
Net interest income 11,259 10,804 33,141 31,988
Provision for loan losses 727 564 2,228 1,537
Noninterest income 1,143 1,310 3,585 3,397
Noninterest expense 7,390 6,936 21,716 20,260
Provision for income taxes 1,534 1,588 4,600 4,695
Net income 2,751 3,026 8,182 8,893
PER SHARE OF COMMON STOCK:
Net income $ 0.30 $ 0.33 $ 0.88 $ 0.95
Dividends declared 0.15 0.13 0.45 0.38
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30
1996 1995
--------------------
<S> <C> <C>
AVERAGE BALANCE SHEET SUMMARY:
Total loans $617,932 $593,415
Investment securities 243,683 231,779
Total assets 934,690 898,843
Deposits 794,263 768,411
Short-term borrowings 22,236 22,150
Equity 105,903 99,285
BALANCES AT END OF PERIOD:
Total assets $944,258 $919,500
Total loans 629,234 610,759
Investment securities 244,715 242,344
Earning assets 880,129 864,578
Deposits 797,463 785,928
Shareholders' equity 107,219 102,108
KEY FINANCIAL RATIOS:
Average equity to average assets 11.33% 11.05%
Return on average assets 1.17% 1.32%
Return on average equity 10.30% 11.94%
Efficiency ratio 59.13% 57.26%
Average total loans to average deposits 77.80% 77.23%
ASSET QUALITY:
Nonperforming loans to total loans 1.18% 1.22%
Nonperforming assets to total assets 0.84% 0.87%
Allowance for loan losses to nonperforming loans 126.90% 115.32%
Allowance for loan losses as a percent of total loans 1.49% 1.41%
</TABLE>
Horizon Bancorp, Inc. is a $944 million bank holding company
headquartered in Beckley, West Virginia.
<PAGE> 5
(in thousands)
PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
<TABLE>
<CAPTION>
As Reported
---------------------------
Horizon Twentieth
Bancorp, Bancorp, Pro Forma Pro Forma
Inc. Inc. Adjustments Consolidated
------------- ------------- -------------- ----- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 22,566 $ 16,908 $ 39,474
Held to maturity securities 33,717 24,159 57,876
Available for sale securities 111,371 78,639 190,010
Loans, net 425,984 182,595 608,579
Premises and equipment 9,994 6,934 16,928
Accrued interest receivable and other assets 14,337 4,800 19,137
--------- --------- ---------- ------- ----------
Total assets $ 617,969 $ 314,035 -- $ 932,004
========= ========= ========== ======= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 72,860 $ 41,087 $ 113,947
Interest bearing 446,305 234,362 680,667
--------- --------- ---------- ------- ----------
Total deposits 519,165 275,449 794,614
Short-term borrowings 19,010 3,035 22,045
Accrued interest payable and other liabilities 7,620 2,500 10,120
--------- --------- ---------- ------- ----------
Total Liabilities 545,795 280,984 826,779
--------- --------- ---------- ------- ----------
Common stock 2,835 1,800 4,671 [1,2] 9,306
Surplus 12,262 7,500 (18) [1] 19,744
Treasury stock (175) -- (175)
Retained earnings 57,549 24,236 (4,653) [2] 77,132
Net unrealized gain/(loss) on AFS securities (297) (485) (782)
--------- --------- ---------- ------- ----------
Total Shareholders' Equity 72,174 33,051 -- 105,225
========= ========= ========== ======= ==========
Total Liabilities and Shareholders' Equity $ 617,969 $ 314,035 -- $ 932,004
========= ========= ========== ======= ==========
</TABLE>
[1] The shareholders' equity accounts have been adjusted to reflect the
issuance of 1,818,000 shares of Horizon common stock at $1 par value.
[2] The shareholders' equity accounts have been adjusted for the two-for-one
stock split effected in the form of a 100% stock dividend, which is payable
December 15, 1996.
<PAGE> 6
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
For the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
(in thousands, except per share data) As Reported
---------------------------
Pro Forma
Horizon Twentieth Consolidated
Bancorp, Bancorp, Pro Forma (adjusted
Inc. Inc. Consolidated for stock
split)
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Interest income $ 24,550 $11,625 $36,175 $ 36,175
Interest expense 9,743 4,550 14,293 14,293
-------- ------- ------- --------
Net interest income before provision for loan losses 14,807 7,075 21,882 21,882
Provision for loan losses 649 852 1,501 1,501
-------- ------- ------- --------
Net interest income 14,158 6,223 20,381 20,381
Other income 1,609 833 2,442 2,442
Other expenses 9,201 5,125 14,326 14,326
-------- ------- ------- --------
Income before income taxes 6,566 1,931 8,497 8,497
Income tax expense 2,320 746 3,066 3,066
-------- ------- ------- --------
Net income $ 4,246 $ 1,185 $ 5,431 $ 5,431
======== ======= ======= ========
Average share outstanding (thousands) 2,830 1,800 4,648 9,296 [3,4]
======== ======= ======= ========
Earnings per share $ 1.50 $ 0.66 $ 1.17 $ 0.58
======== ======= ======= ========
</TABLE>
[3] Average shares outstanding have been adjusted for the exchange ratio (1.01
shares of Horizon for each share of Twentieth).
[4] Average shares outstanding have been adjusted for the recently announced
Horizon two-for-one stock split effected in the form of a 100% stock dividend,
which is payable December 15, 1996.
<PAGE> 7
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
For the Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
(in thousands, except per share data) As Reported
----------------------
Pro Forma
Horizon Twentieth Consolidated
Bancorp, Bancorp, Pro Forma (adjusted
Inc. Inc. Consolidated for stock
split)
-------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 22,128 $ 11,646 $ 33,774 $ 33,774
Interest expense 8,275 4,315 12,590 12,590
-------- ------- -------- --------
Net interest income before provision for loan losses 13,853 7,331 21,184 21,184
Provision for loan losses 485 488 973 973
-------- ------- -------- --------
Net interest income 13,368 6,843 20,211 20,211
Other income 1,266 821 2,087 2,087
Other expenses 8,553 4,771 13,324 13,324
-------- ------- -------- --------
Income before income taxes 6,081 2,893 8,974 8,974
Income tax expense 1,934 1,173 3,107 3,107
-------- ------- -------- --------
Net income $ 4,147 $ 1,720 $ 5,867 $ 5,867
-------- ------- -------- --------
Average share outstanding (thousands) 2,835 1,797 4,668 9,300 [3,4]
-------- ------- -------- --------
Earnings per share $ 1.46 $ 0.96 $ 1.26 $ 0.63
-------- ------- -------- --------
</TABLE>
[3] Average shares outstanding have been adjusted for the exchange ratio (1.01
shares of Horizon for each share of Twentieth).
[4] Average shares outstanding have been adjusted for the recently announced
Horizon two-for-one stock split effected in the form of a 100% stock dividend,
which is payable December 15, 1996.
<PAGE> 1
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Primary:
Average shares
outstanding............ 9,296,346 9,298,122 9,305,746
Net effect of options.. 10,539 4,230 170
----------------------------------------------
Total.................. 9,306,885 9,302,352 9,305,916
==============================================
Net Income............. 11,151,000 11,482,000 10,125,000
Earnings Per Share..... $ 1.20 $ 1.23 $ 1.09
==============================================
Fully Diluted:
Average shares
outstanding............ 9,296,346 9,298,122 9,305,746
Net effect of options.. 11,623 4,984 170
----------------------------------------------
Total.................. 9,307,969 9,303,106 9,305,916
----------------------------------------------
Net Income............. 11,151,000 11,482,000 10,125,000
Earnings Per Share..... $ 1.20 $ 1.23 $ 1.09
==============================================
</TABLE>
<PAGE> 1
EXHIBIT (12) - STATEMENT RE: COMPUTATION OF RATIOS
COMPUTATION OF RATIOS
Average Equity to Average Assets = Average Equity Divided by Average Assets
Return on Average Assets = Net Income Divided by Average Assets
Return on Average Equity = Net Income Divided by Average Equity
Efficiency Ratio = Total Other Expenses Divided by Net Interest Income Plus
Total Other Income
Dividends Declared as a Percent of Net Income = Cash Dividends Divided by Net
Income
Average Total Loans to Average Deposits = Average Total Loans Divided by
Average Deposits
Nonperforming Loans to Total Loans = Nonaccruing Loans Plus Loans Ninety Days
Past Due and Accruing Interest plus Restructured Loans Divided by Total Loans
Nonperforming Assets to Total Assets = Nonaccruing Loans plus Loans Ninety Days
Past Due and Accruing Interest plus
Restructured Loans plus Other Real
Estate Owned plus In-substance
Foreclosures Divided by Total Assets
Allowance for Loan Losses to Nonperforming Loans = Allowance for Loan Losses
Divided by Nonaccruing Loans
plus Loans Ninety Days Past
Due and Accruing Interest
Plus Restructured Loans
Allowance for Loan Losses as a Percent of Total Loans = Allowance for Loan
Losses Divided by
Total Loans
<PAGE> 1
EXHIBIT (13) - HORIZON BANCORP, INC. 1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Consolidated Financial Highlights.................... 1 Consolidated Financial Statements...................... 23
Letter to Our Shareholders, Customers and Notes to Consolidated Financial Statements............. 27
Friends........................................... 2 Shareholders' Information.............................. 40
Management's Discussion & Analysis of Directors, Horizon Bancorp, Inc. and
Financial Condition and Results of Affiliates.......................................... 41
Operations........................................ 5 Additional Information................................. 42
Report of Independent Auditors....................... 21
</TABLE>
- -------------------------------------------------------------------------------
Consolidated Financial Highlights
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
FOR THE PERIOD ENDED
Net interest income.................................................. $44,369 $43,018
Noninterest income................................................... 4,855 4,629
Net income........................................................... 11,151 11,482
Cash dividends....................................................... 4,673 2,973
PER SHARE DATA
Net income........................................................... $ 1.20 $ 1.23
Cash dividends declared.............................................. 0.62 0.53
Year-end book value.................................................. 11.77 11.23
SELECTED AVERAGE BALANCES
Total assets......................................................... $942,448 $917,008
Total loans.......................................................... 621,227 597,857
Investment securities................................................ 253,307 242,281
Earning assets....................................................... 888,531 860,430
Deposits............................................................. 803,824 787,803
Shareholders' equity................................................. 105,793 98,890
SELECTED BALANCES AT YEAR-END
Total assets......................................................... $947,068 $942,902
Total loans.......................................................... 633,984 620,570
Investment securities................................................ 248,664 256,202
Earning assets....................................................... 885,103 881,447
Deposits............................................................. 797,996 805,581
Shareholders' equity................................................. 109,411 104,383
SELECTED RATIOS
Return on average equity............................................. 10.54% 11.61%
Return on average assets............................................. 1.18% 1.25%
Net interest margin (taxable equivalent)............................. 5.17% 5.16%
Net charge-offs to average total loans............................... 0.36% 0.36%
Average equity to average assets..................................... 11.23% 10.78%
</TABLE>
<PAGE> 2
- -------------------------------------------------------------------------------
LETTER TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS
- -------------------------------------------------------------------------------
DEAR HORIZON SHAREHOLDERS:
We are pleased to present our 1996 annual report detailing another
exciting year for Horizon and our shareholders. In 1996, we added a fifth bank
to our franchise increasing total assets 54.1% to $947.07 million and expanding
our market area. Our guiding principle remains the enhancement of franchise
value through centralizing back room operations while maintaining autonomy and
strong customer support in the local communities. In each of the last two
years, Horizon has experienced increases in noninterest bearing deposits. This
growth is unique in a time when competition for deposits by bank and nonbank
companies has become intense and is reaffirmation from the marketplace that our
community banking concept and focus on customer service represent a successful
strategy.
On August 30, 1996, Horizon consummated its acquisition of Twentieth
Bancorp, Inc. (Twentieth). Twentieth is ranked second in market share in the
Huntington area, one of the top two cities in West Virginia. The synergies
created by the combination of Twentieth's strong customer base and earnings
potential and Horizon's ability to realize economies through centralized
operations should continue to enhance shareholder value in 1997 and beyond.
Despite consummating a significant merger, your Company was able to
report strong earnings in 1996. Net income for 1996 was $11.15 million or $1.20
per share, down from $11.48 million or $1.23 per share in 1995. Excluding
one-time nonrecurring merger related costs, Horizon's net income increased 7.8%
to $12.38 million or $1.33 per share. By focusing a good deal of time and
resources on positioning Horizon to excel in the future, we were able to
maintain our efficiency ratio at 58.1% in 1996. Without the one time
nonrecurring merger costs, Horizon's efficiency ratio actually improved to
55.5%.
Net interest margin stands as the foundation of our success. At 5.2% in
1996, Horizon's net interest margin continues to rank above that of our peer
group. We are continually challenged to maintain this level of net interest
margin in today's competitive environment.
Our asset quality continues to improve. Nonperforming assets as a
percentage of total assets declined from 1.26% in 1995 to 1.13% in 1996. The
allowance for loan losses remains strong, increasing from 109.3% of
nonperforming loans in 1995 to 125.9% in 1996. The allowance increased from
1.37% of total loans in 1995 to 1.52% in 1996.
The Company's significant capital position is both a strength and a
challenge. With total equity of $109.41 million at December 31, 1996, or 11.6%
of total assets, your Company's capital is well above the amounts necessary to
be categorized as "well capitalized" by regulatory agencies. Our challenge is
to utilize our capital and improve our return on equity. Paying dividends is
one way of improving return on equity. The annual dividend increased to $.62
per share from $.53 in 1995. Another is to leverage some capital through
acquisitions. Our strong equity position continues to support the Company's
strategic initiative of growth through acquisition.
We encourage you to read "Management's Discussion and Analysis" in this
report for a more complete explanation of Horizon's financial performance. We
think that you will be pleased.
The success of our strategy for increasing shareholder wealth is most
evident by examining shareholder value over the past five years. Shareholders
owning Horizon stock on January 1, 1992, have enjoyed a 338% increase in the
value of their stock through March 5, 1997. An investment of $100 has grown to
$338, for a compound annual growth rate of 27.6%. This remarkable growth in
shareholder value has exceeded industry averages in each of the past five
years.
Our banks hold the enviable position of being either first or second in
market share in each community that we serve. A technological infrastructure
designed to efficiently deliver products and services to our customers as well
as improve our operating efficiencies is a primary component to competing now
and in the future. Horizon embraces this concept and continually monitors
changes in technology to keep our affiliates at a level that enables them to be
competitive in today's financial services industry. Our approach to
implementing new technology will always be to improve delivery systems, provide
a positive environment for our employees to serve our customers and protect our
loyal customer base while expanding that base by attracting profitable new
customers.
<PAGE> 3
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We are optimistic that 1997 will be an exceptional year for Horizon. The
positioning efforts of the past year combined with our strong capital base have
generated momentum and positioned us to expand our franchise in a profitable
manner. As always, we continue to explore acquisition opportunities that will
complement our strategy and enhance the value of our franchise. In 1997, we
will be more active in meeting with analysts and brokers to better communicate
Horizon's franchise value and plans for future enhancements. We believe that
the more people know about us, the more they will see the benefits of joining
our family of community banks.
Horizon's success is a reflection of the people who serve our customers
each day. Their attitudes, energy and dedication are unparalleled in our
markets. Their efforts enable Horizon to aim higher, reach farther and
continually attain greater levels of success.
We are most grateful for our many shareholders and for the dedication and
support that you have shown over the years. Our goal always is to deliver
superior performance while enhancing the value of your investment in Horizon.
We look forward to seeing you at our annual meeting on April 22, 1997, at
The Greenbrier, White Sulpher Springs, West Virginia. Your comments and
suggestions are always welcome and appreciated.
Yours sincerely,
/s/ FRANK S. HARKINS, JR. /s/ PHILIP L. MCLAUGHLIN
- ------------------------------ ------------------------------
Frank S. Harkins, Jr. Philip L. McLaughlin
Chairman of the Board & CEO President & COO
EARNINGS PER SHARE/DIVIDENDS PER SHARE
<TABLE>
<CAPTION>
Earnings Dividends
per Share per Share
<S> <C> <C>
1992 $0.95 $0.43
1993 $1.02 $0.47
1994 $1.09 $0.49
1995 $1.23 $0.53
1996 $1.20 $0.62
</TABLE>
<PAGE> 4
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINANCIAL
SUMMARY
&
REVIEW
HORIZON BANCORP, INC.
<PAGE> 5
- -------------------------------------------------------------------------------
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.
On August 30, 1996, Horizon effected a business combination with Twentieth
Bancorp, Inc. (Twentieth) by issuing 1,817,873 shares (prior to the stock split
mentioned below) of Horizon common stock for all of the outstanding common
stock of Twentieth. This transaction was accounted for under the pooling of
interests method, and accordingly, all of the financial information included in
this discussion has been restated to include the activity of Twentieth for all
periods presented.
Throughout the following discussion, dollars are expressed in thousands, except
per share data. Per share data has been adjusted to reflect a two-for-one stock
split effected in the form of a 100% stock dividend for shareholders of record
on December 1, 1996.
<TABLE>
<CAPTION>
TABLE 1
FIVE-YEAR SELECTED FINANCIAL SUMMARY
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 73,639 $ 70,618 $ 62,231 $ 61,029 $ 65,135
Interest expense 29,270 27,600 21,689 23,189 29,239
Net interest income 44,369 43,018 40,542 37,840 35,896
Provision for loan losses 3,334 2,505 2,264 2,337 2,962
Noninterest income 4,855 4,629 3,594 3,963 3,835
Noninterest expense 28,589 27,653 26,898 25,625 23,893
Provision for income taxes 6,150 6,007 4,849 4,345 4,004
Net income 11,151 11,482 10,125 9,496 8,872
PER SHARE OF COMMON STOCK:
Net income $ 1.20 $ 1.23 $ 1.09 $ 1.02 $ 0.95
Dividends declared 0.62 0.53 0.49 0.47 0.43
Book value 11.77 11.23 9.98 9.56 8.90
AVERAGE BALANCE SHEET SUMMARY:
Total loans $621,227 $597,857 $552,202 $509,008 $467,077
Investment securities 253,307 242,281 252,023 275,019 289,060
Total assets 942,448 917,008 870,779 854,794 829,550
Deposits 803,824 787,803 751,773 742,729 722,740
Equity 105,793 98,890 90,873 85,966 80,163
BALANCES AT YEAR-END:
Total assets $947,068 $942,902 $882,606 $864,017 $848,255
Total loans 633,984 620,570 582,206 531,026 494,387
Investment securities 248,664 256,202 237,266 270,009 273,079
Earning assets 885,103 881,447 824,822 813,683 796,457
Deposits 797,996 805,581 762,619 748,798 739,208
Shareholders' equity 109,411 104,383 92,892 88,943 82,816
KEY FINANCIAL RATIOS:
Average equity to average assets 11.23% 10.78% 10.44% 10.06% 9.66%
Return on average assets 1.18% 1.25% 1.16% 1.11% 1.07%
Return on average equity 10.54% 11.61% 11.14% 11.05% 11.07%
Efficiency ratio 58.08% 58.04% 60.94% 61.30% 60.14%
Dividends declared as a percent of
net income 51.67% 43.09% 44.95% 46.08% 45.26%
Average total loans to average deposits 77.28% 75.89% 73.45% 68.53% 64.63%
ASSET QUALITY:
Nonperforming loans to total loans 1.13% 1.26% 1.01% 1.81% 1.47%
Nonperforming assets to total assets 0.81% 0.89% 0.79% 1.23% 1.20%
Allowance for loan losses to
nonperforming loans 133.54% 109.27% 138.75% 75.93% 88.46%
Allowance for loan losses as a percent
of total loans 1.52% 1.37% 1.40% 1.37% 1.30%
</TABLE>
<PAGE> 6
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
EARNINGS SUMMARY
Horizon earned $11,151 for the year ended December 31, 1996, as compared to
$11,482 and $10,125 for the years ended December 31, 1995 and 1994,
respectively. Earnings per share were $1.20 in 1996, a decrease of 2.4% from
the $1.23 earned in 1995, which follows the 12.8% increase in 1995 over the
$1.09 earned in 1994. The decrease in 1996 earnings was primarily due to
acquisition-related nonrecurring charges of $1,230, net of tax, or $0.13 per
share. These charges were necessary to allow Horizon and Twentieth to take
advantage of the economies of the resulting larger organization. Excluding
these charges, earnings increased 8.1% to $1.33 per share or $12,381 for the
year ended December 31, 1996. Earnings increased 13.4% in 1995 over 1994 and
were favorably impacted by increases in net interest income and other income of
6.1% and 28.8%, respectively. These increases were partly offset by a 2.8%
increase in other expenses and a 5.9% increase in the effective tax rate.
EARNINGS PER SHARE
<TABLE>
<S> <C>
1992 $0.95
1993 $1.02
1994 $1.09
1995 $1.23
1996 $1.20
</TABLE>
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, 1996, Horizon's ROA was 1.18%, compared to 1.25% and
1.16% for the years ended December 31, 1995 and 1994. For the year ended
December 31, 1996, Horizon's ROE totaled 10.54%, compared to 11.61% and 11.14%
for the years ended December 31, 1995 and 1994. ROA and ROE both declined in
1996 due to lower net income caused by the merger and a growing balance sheet.
Exclusive of the acquisition-related nonrecurring charges of $1,230, ROA was
1.31% and ROE was 11.70%, up 4.8% and 0.8%, respectively.
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
<TABLE>
<S> <C>
1992 1.07%
1993 1.11%
1994 1.16%
1995 1.25%
1996 1.18%
</TABLE>
RETURN ON AVERAGE EQUITY
<TABLE>
<S> <C>
1992 11.07%
1993 11.05%
1994 11.14%
1995 11.61%
1996 10.54%
</TABLE>
<PAGE> 7
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 1996
and 1995 and 34.0% in 1994.
Net interest income was $45,946 in 1996, an increase of 3.4% over 1995,
following a 5.8% increase in 1995 over the 1994 level. The most significant
component of the increase in net interest income in 1996 was in volume of
earning assets, more specifically loans. These increases are representative of
economic activity and the continuing efforts of management to increase Horizon's
market share of loans. As shown in Table 3, Rate Volume Analysis, increases in
the volume of earning assets in both 1996 and 1995 have provided a significant
increase in net interest income. In 1996, $2,519 of the increase in interest
income was attributable to an increase in the volume of earning assets while
$657 was due to changes in interest rates. As a result, total interest income
increased by $3,176 in 1996 over 1995. The expense of funding these assets,
interest expense, increased $1,670 in 1996 to $29,270, primarily due to an
increase of 30 basis points in the cost of certificates of deposit. In 1995, an
increase in the interest rate environment increased the rate component of total
interest income $5,090 and interest expense $3,990 over 1994. In 1995, earning
asset volume increased total interest income by $3,240, 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 1996 and
1995 and 5.1% in 1994. 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 $28,101 or 3.3% during 1996 and
$36,907 or 4.5% during 1995. Average interest bearing liabilities increased
$8,301 or 1.2% in 1996 and $31,901 or 4.8% in 1995. Average total loans
increased 3.9% during 1996, compared to an increase of 8.3% during 1995. As
previously noted, these increases are representative of current economic
activity and efforts by management to extend its market share. The 1996
increase in average total loans has been partially funded through increased
average interest bearing and noninterest bearing deposits. Horizon has
attracted additional deposits due to core growth, primarily in the demand
deposits. Management has made efforts to lower the average balance of federal
funds sold and deploy these funds into higher-yielding assets.
Average short-term borrowings, which are principally repurchase agreements, and
federal funds sold increased $1,786 or 9.0% in 1996 following an average
balance decrease of $1,118 or 5.3% in 1995.
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.
<PAGE> 8
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE 2
NET INTEREST MARGIN
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------
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:
Interest bearing deposits with $ - $ - -% $ - $ - -% $ 963 $ 87 9.0%
other banks
Federal funds sold 13,997 810 5.8 20,292 1,157 5.7 18,335 764 4.2
Investment securities:
Taxable (3) 200,584 12,579 6.3 197,495 12,185 6.2 205,312 12,319 6.0
Tax exempt (1) 52,723 4,112 7.8 44,786 3,623 8.1 46,711 3,884 8.3
--------------------------------------------------------------------------------------
Total investment securities 253,307 16,691 6.6 242,281 15,808 6.5 252,023 16,203 6.4
Total loans (1)(2) 621,227 57,715 9.3 597,857 55,075 9.2 552,202 46,656 8.4
--------------------------------------------------------------------------------------
Total earning assets and
interest income 888,531 75,216 8.5 860,430 72,040 8.4 823,523 63,710 7.7
Noninterest earning assets:
Cash and due from banks 28,372 27,607 24,860
Premises and equipment 16,929 16,321 13,993
Other assets 17,732 21,149 16,000
Less: Allowance for loan losses (9,116) (8,499) (7,597)
--------- ------------ ------------
Total assets $942,448 $917,008 $870,779
========= ============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits $137,227 $ 3,700 2.7% $126,843 $ 3,558 2.8% $128,787 $ 3,373 2.6%
Savings deposits 201,723 6,592 3.3 208,899 6,435 3.1 252,623 7,166 2.8
Certificates of deposit 349,215 18,132 5.2 345,908 16,876 4.9 267,221 10,513 3.9
--------------------------------------------------------------------------------------
Total interest bearing deposits 688,165 28,424 4.1 681,650 26,869 3.9 648,631 21,052 3.2
Short-term borrowings 21,721 846 3.9 19,935 731 3.7 21,053 637 3.0
--------------------------------------------------------------------------------------
Total interest bearing
liabilities and
interest expense 709,886 29,270 4.1 701,585 27,600 3.9 669,684 21,689 3.2
------------------- ------------------- ------------------
Noninterest bearing liabilities:
Demand deposits 115,659 106,153 103,142
Other 11,110 10,380 7,080
--------- ------------ ------------
Total liabilities 836,655 818,118 779,906
Shareholders' equity 105,793 98,890 90,873
--------- ------------ ------------
Total liabilities and
shareholders' equity $942,448 $917,008 $870,779
========= ============ ============
Net interest income $45,946 $44,440 $42,021
=========== =========== ===========
Spread 4.4% 4.5% 4.5%
========= ========= ========
Net interest margin 5.2% 5.2% 5.1%
========= ========= ========
</TABLE>
(1) Fully taxable equivalent using 35% in 1996 and 1995 and 34% in 1994.
(2) Nonaccrual loans are included in average balances.
(3) Average balances of available-for-sale securities are stated at fair
value.
<PAGE> 9
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE 3
RATE/VOLUME ANALYSIS
-------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
DUE TO CHANGE IN DUE TO CHANGE IN
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with other banks $ - $ - $ - $ (87) $ - $ (87)
Federal funds sold (367) 20 (347) 90 303 393
Securities:
Taxable 194 200 394 (510) 376 (134)
Tax-exempt 626 (137) 489 (165) (96) (261)
-------------------------------------------------------------------
Total investment securities 820 63 883 (675) 280 (395)
Total loans 2,066 574 2,640 3,912 4,507 8,419
-------------------------------------------------------------------
Total interest income 2,519 657 3,176 3,240 5,090 8,330
Demand deposits 276 (134) 142 (55) 240 185
Savings deposits (236) 393 157 (1,388) 657 (731)
Certificates of deposit 170 1,086 1,256 3,402 2,961 6,363
Short-term borrowings 72 43 115 (38) 132 94
-------------------------------------------------------------------
Total interest expense 282 1,388 1,670 1,921 3,990 5,911
-------------------------------------------------------------------
Net interest income $2,237 $ (731) $1,506 $1,319 $1,100 $2,419
===================================================================
</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 $226 or 4.9% in 1996 compared to 1995. The 1996 increase reflects
growth of $49 or 1.7% in service charges and fees, growth in trust income of
$36 or 4.1% and growth in other income of $89 or 9.0%. Service charges
increased due to higher deposit balances coupled with increased transactions
subject to service charges while trust income increased due to growth of trust
assets. The increase in other income was due to increased insurance commissions
related to various lending products, and growth in other miscellaneous
categories.
Noninterest income increased in 1995 by $1,035 or 28.8% due partly to the
change in investment securities losses of $131 in 1995 compared to losses of
$533 in 1994. Investment securities losses were due to restructuring of the
investment portfolio and employing a strategy designed to take advantage of
higher yielding investments. Losses on security transactions were offset by
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 regional bank. Trust income increased due to
growth and increased estate settlements. 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
1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees $2,937 $2,888 $2,553 $2,313 $1,849
Trust income 923 887 834 744 609
Investment securities (losses) and gains (79) (131) (533) 87 253
Other 1,074 985 740 819 1,124
-------------------------------------------------------------------
Total $4,855 $4,629 $3,594 $3,963 $3,835
===================================================================
</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 increased $936 or 3.4% for the year ended
December 31, 1996 and $755 or 2.8% for the year ended December 31, 1995.
<PAGE> 10
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Salaries and employee benefits increased $311 or 2.5% during 1996 and $626 or
5.2% during 1995. The increase in 1996 was primarily due to severance costs for
displaced employees and normal salary increases. In 1995, the increase was
caused by additional salaries and employee benefits associated with the
purchase of four branches from a regional bank and normal salary increases. At
December 31, 1996, Horizon had 400 full-time equivalent employees, compared to
437 at December 31, 1995.
For the year ended December 31, 1996, net occupancy expense and equipment
expenses decreased $198 or 5.2% compared to 1995, primarily due to management's
efforts to control these costs. In 1995, net occupancy and equipment expenses
increased $677 or 21.5% primarily because of additional depreciation on
building and equipment and technology enhancements which included image
processing.
Outside data processing expense was virtually unchanged in 1996, increasing $10
or 0.5% from 1995. In 1995, outside data processing increased $191 or 10.6%
over 1994. The principal reasons for the increase were growth in items
processed and the mid-year conversion of two affiliate banks.
Deposit insurance and assessments decreased $975 or 98.9% in 1996 because of a
decline in FDIC insurance premiums. This compares to a decrease of $825 or
45.6% in 1995. During 1995, the FDIC lowered the deposit insurance premium for
a "well capitalized institution" from twenty-three cents to four cents per $100
of average deposits and refunded a substantial portion of the first six months'
premium. In December 1995, the FDIC set the 1996 premium for insured deposits
at the statutory minimum of $2 per year per institution.
Advertising expense decreased $173 or 22.8% in 1996 from 1995. In 1995,
advertising decreased $2 from 1994. These reductions were due to management's
efforts to control expenses.
Increases in other operating expenses generally reflect expanded programs,
growth in business activity, and inflation. Other operating expense increased
$1,961 or 26.0% during 1996 compared to an increase of $88 or 1.2% during 1995.
The increase in 1996 was primarily due to investment banking and other
professional fees of $1,147 related to acquisition activity, an increase in
losses other than loans of $144 due primarily to the receipt of $150 of
insurance proceeds for covered losses in 1995, and an increase of $256 in cost
of operations for the credit card department due to growth and costs associated
with implementation of new products.
<TABLE>
<CAPTION>
TABLE 5
NONINTEREST EXPENSE
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $12,878 $12,567 $11,941 $11,918 $10,701
Net occupancy and equipment 3,624 3,822 3,145 2,832 2,669
Outside data processing 1,996 1,986 1,795 1,582 1,495
Federal deposit insurance 11 986 1,811 1,851 1,769
Advertising 585 758 760 712 689
Other 9,495 7,534 7,446 6,730 6,570
------------------------------------------------------------------------
Total $28,589 $27,653 $26,898 $25,625 $23,893
------------------------------------------------------------------------
</TABLE>
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 35.5% in
1996, 34.3% in 1995, and 32.4% in 1994. The increase in 1996 was primarily the
result of an increase in nondeductible merger-related expenses. The increase in
1995 was due to Horizon's move into a higher federal corporate income tax
bracket.
Refer to Note 9 in Notes to Consolidated Financial Statements for more
information concerning income taxes.
<TABLE>
<CAPTION>
TABLE 6
APPLICABLE INCOME TAXES
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes $17,301 $17,489 $14,974 $13,841 $12,876
Applicable income taxes 6,150 6,007 4,849 4,345 4,004
Effective tax rate 35.5% 34.3% 32.4% 31.4% 31.1%
</TABLE>
<PAGE> 11
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
QUARTERLY RESULTS
The results of operations for the first three quarters of 1996 have been
disclosed in quarterly reports to shareholders. Note 16 of the Notes to
Consolidated Financial Statements provides summarized unaudited financial data
on a quarterly basis.
For the fourth quarter of 1996, net income totaled $2,969. These results
represented an increase of $380 or 14.7% from the net income of $2,589 in the
fourth quarter of 1995. On a per share basis, net income in the fourth quarter
of 1996 was $0.32, compared to $0.28 in 1995. This represents an increase of
$0.04 or 14.3%.
When compared with the fourth quarter of 1995, Horizon's fourth quarter 1996
results reflected higher net interest income and lower noninterest expense
which was offset by increased provision for loan losses. Net interest income
totaled $11,288 in the fourth quarter of 1996, an increase of $198 or 1.8% from
the net interest income total of $11,030 in the fourth quarter of 1995. Lower
noninterest expense in the fourth quarter of 1996 indicated the synergies from
the Twentieth merger were being realized. During the fourth quarter of 1996,
Horizon increased the provision for loan losses due to the unexpected
deterioration of a commercial loan.
BALANCE SHEET ANALYSIS
LOANS
Horizon's loan portfolio is its largest earning asset and approximated 66.9% of
total assets at December 31, 1996 and 65.8% at December 31, 1995. Total loans
were $633,984 at December 31, 1996, an increase of $13,414 or 2.2% from the
December 31, 1995 total of $620,570. This follows an increase of $38,364 or
6.6% in 1995 from December 31, 1994. The loan-to-deposit ratio continued its
upward trend in 1996, ending the year at 79.4%. This ratio was 77.0% and 76.3%
at December 31, 1995 and 1994, respectively.
Commercial loans comprised 34.5% of total loans at December 31, 1996, and 32.8%
at December 31, 1995. Commercial loans have increased $15,190 or 7.5% from
$203,524 at December 31, 1995 to $218,714 at December 31, 1996. Real estate
construction, primarily commercial real estate, loans made up 1.3% of
outstanding loans at December 31, 1996 compared to 0.8% at December 31, 1995.
The growth is due to an effective officer call program and generally positive
economic conditions in Horizon's market area.
Residential real estate loans comprised 36.0% of total loans at December 31,
1996, and 36.6% at December 31, 1995. At December 31, 1996, residential real
estate loans totaled $228,447 and represented an increase of $1,071 or 0.5%
from the previous year end. During the twelve months ended December 31, 1995,
residential real estate loans increased $809 or 0.4%.
Consumer loans totaled $178,758 at December 31, 1996 or 28.2% of total loans.
This represented a decline of $6,039 or 3.3% from the December 31, 1995 total
of $184,797. Consumer loans are borrowings of individuals for automobiles and
household and other personal purposes. The decline is due to increased
competition for consumer loans and Horizon's reluctance to reduce underwriting
standards to book loans. For the twelve months ended December 31, 1995,
consumer loans increased $14,969 or 8.8% from December 31, 1994. The primary
reason for the increase was the purchase of four branch offices of a regional
bank. Credit card loans, included in consumer loans, totaled $14,774 at
December 31, 1996. This represented an increase of $1,958 or 15.3% from
$12,816 at December 31, 1995.
AVERAGE LOANS/AVERAGE DEPOSITS
<TABLE>
<S> <C>
1992 64.63%
1993 68.53%
1994 73.45%
1995 75.89%
1996 77.28%
</TABLE>
<PAGE> 12
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE 7
SUMMARY OF LOANS BY TYPE
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $218,714 $203,524 $178,798 $164,302 $142,066
Real estate - construction 8,065 4,873 7,013 9,266 3,180
Real estate - mortgage 228,447 227,376 226,567 204,778 213,971
Consumer loans 185,099 192,052 174,530 157,894 141,574
-------------------------------------------------------------------
Gross loans 640,325 627,825 586,908 536,240 500,791
Unearned income (6,341) (7,255) (4,702) (5,214) (6,404)
-------------------------------------------------------------------
Total loans 633,984 620,570 582,206 531,026 494,387
Allowance for loan losses (9,607) (8,522) (8,153) (7,301) (6,410)
-------------------------------------------------------------------
Net loans $624,377 $612,048 $574,053 $523,725 $487,977
===================================================================
</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 13
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 $109,970 $ 77,781 $ 30,963 $218,714
Real estate - construction 8,065 - - 8,065
Real estate - mortgage 85,085 45,768 97,594 228,447
Consumer loans 50,465 112,927 15,366 178,758
-------------------------------------------------------------------
Total loans $253,585 $236,476 $143,923 $633,984
===================================================================
Loans with a predetermined interest rate due after one year $201,503
Loans with a floating interest rate due after one year $178,896
</TABLE>
INVESTMENT SECURITIES
At December 31, 1996, investment securities totaled $248,664 and declined
$7,538 or 2.9% from $256,202 at December 31, 1995. From December 31, 1995 to
December 31, 1996, U.S. Treasury and federal agency securities declined $15,308
or 9.0%, obligations of states and political subdivisions increased $16,557 or
34.8%, other securities decreased $4,973 or 25.5% and mortgage-backed
securities declined $3,814 or 20.1%. U.S. Treasury and federal agency
securities have traditionally represented a substantial portion of the
securities portfolio. At December 31, 1996, U.S. Treasury and federal agency
securities were $154,839 or 62.3% of the portfolio total and at December 31,
1995, comprised $170,147 or 66.4% 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 increased $18,936 or 8.0% from December 31, 1994 to
December 31, 1995. This increase was the result of deposit growth of 5.6%.
Investment securities provide a source of liquidity along with opportunities to
increase 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.
31
<PAGE> 13
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Securities of states and political subdivisions totaled $64,184 at December 31,
1996, and increased $16,557 or 34.8% from the previous year. This follows an
increase of $1,852 or 4.0% from December 31, 1994 to December 31, 1995. The
purchase of municipal securities was the result of tax planning by Horizon.
Horizon's investments in 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
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and federal agencies-AFS $154,839 $139,090 $ 73,407 $ - $ -
U.S. Treasury and federal agencies-HTM - 31,057 91,686 195,486 211,073
States and political subdivisions-AFS 21,443 11,481 - - -
States and political subdivisions-HTM 42,741 36,146 45,775 46,951 27,103
Other securities-AFS 14,494 19,367 4,248 - -
Other securities-HTM - 100 1,580 7,287 7,543
Mortgage-backed securities-AFS 15,147 18,961 20,508 - -
Mortgage-backed securities-HTM - - 62 20,285 27,360
-------------------------------------------------------------------
Total $248,664 $256,202 $237,266 $270,009 $273,079
===================================================================
</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 $15,147
at December 31, 1996, a decrease of $3,814 or 20.1% from the December 31, 1995
total of $18,961. 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 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.
As permitted by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, Horizon chose to
reclassify certain securities held by Twentieth at the date of acquisition from
held-to-maturity to available-for-sale to conform to Horizon's policies. 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.
During December 1995, Horizon transferred securities with amortized cost of
$44,586 from the held-to-maturity category to the available-for-sale category.
The unrealized gain on these securities was $275 (net of $191 in deferred
income taxes), which was included in shareholders' equity. This transfer was
permitted by the one-time "holiday" approved by the Financial Accounting
Standards Board for transfers of held-to-maturity securities. The transfer gave
Horizon additional flexibility in managing the investment securities portfolio.
At December 31, 1996, Horizon classified 82.8% of its securities as
available-for-sale and 17.2% as held-to-maturity. The unrealized gain on
available-for-sale securities, net of deferred taxes, totaled $645 at December
31, 1996. At December 31, 1995, Horizon classified 73.7% of its securities as
available-for-sale and 26.3% of its securities as held-to-maturity. The
unrealized gain on available-for-sale securities, net of deferred taxes,
totaled $1,569 at December 31, 1995.
32
<PAGE> 14
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 $14,570 5.97% $ 50,659 6.29% $ - -% $ - -% $ 65,229 6.22%
Federal agencies-AFS 9,327 6.28 47,907 6.34 32,376 7.28 - - 89,610 6.67
States and political
subdivisions-AFS 13 8.12 6,558 5.89 7,693 4.95 7,179 5.22 21,443 5.33
States and political
subdivisions-HTM 804 5.88 10,928 5.06 21,770 4.92 9,239 5.17 42,741 5.03
Other securities-AFS 8,131 5.98 2,851 6.92 2,622 7.34 890 6.28 14,494 6.43
Mortgage-backed securities-AFS 2,941 6.26 3,804 7.10 1,691 5.95 6,711 6.12 15,147 6.37
-------------------------------------------------------------------------------------------------
Total investment securities $35,786 6.08% $122,707 6.22% $66,152 6.20% $24,019 5.49% $248,664 6.12%
=================================================================================================
</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 nor does Horizon use brokered funds.
Total deposits decreased $7,585 or 0.9% when compared with the December 31,
1995 total of $805,581. This decrease is 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. During 1995, total deposits increased $42,962
or 5.6%, partially due to the purchase of four branches from a regional bank.
Deposits purchased totaled approximately $21,000. The remaining growth was
attributed to the willingness of the customers to conduct business with banks
perceived as locally owned and community oriented.
Noninterest bearing deposits totaled $119,831 at December 31, 1996, an increase
of $3,303 or 2.8% from December 31, 1995. This follows an increase of $265 from
December 31, 1994 to December 31, 1995. Growth in both years is unique in a
time when competition for deposits by bank and nonbank companies has become
intense. Horizon's community banking philosophy and resulting personalized
customer service are the reasons for the growth in noninterest bearing
deposits.
Certificates of deposit in denominations of $100,000 or more are included in
interest bearing deposits and totaled $65,173 at December 31, 1996. This is an
increase of $5,330 or 8.9% from the December 31, 1995 total of $59,843.
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
higher rates offered on the certificates of deposit during 1996 compared to the
rate paid in 1995. Large denomination certificates of deposit comprise 8.2% of
total deposits at December 31, 1996, having increased from 7.4% at December 31,
1995. Established customers maintain most of the large certificates of deposit
and are considered stable. It is not the policy of the subsidiary banks to
actively bid for large denomination certificates of deposit.
<TABLE>
<CAPTION>
TABLE 11
MATURITIES OF CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE
-------------------------------------------------------------
AS OF DECEMBER 31
1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $23,211 $22,868 $17,610 $16,001 $28,463
Over three months through six months 11,885 12,652 11,692 8,519 7,876
Over six months through twelve months 20,459 12,842 9,533 10,230 4,626
Over twelve months 9,618 11,481 7,398 4,046 834
-------------------------------------------------------------
Total $65,173 $59,843 $46,233 $38,796 $41,799
=============================================================
</TABLE>
BORROWED FUNDS
Short-term borrowings consist of securities purchased 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, 1996, short-term borrowings totaled
$29,154 and were comprised of $20,464 in securities sold under agreements to
repurchase and $8,690 in federal funds purchased. This total is compared to
$17,097 in securities sold under agreements to
33
<PAGE> 15
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
repurchase, $3,945 in federal funds purchased, and $1,275 in Federal Home Loan
Bank borrowings at December 31, 1995. The average daily balance of short-term
borrowings in 1996 was $21,721 at a weighted average rate of 3.9%. In 1995, the
average daily balance of short-term borrowings was $19,935 and $21,053 in 1994.
Refer to Note 8 in Notes to Consolidated Financial Statements for additional
information on short-term borrowings.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $5,028 or 4.8% at December 31, 1996, from
$104,383 at December 31, 1995. In October 1996, Horizon approved a two-for-one
stock split effected in the form of a 100% stock dividend payable on December
15, 1996. A frequent measure of capital adequacy is the primary capital ratio
which increased from 11.07% at December 31, 1995 to 11.55% at December 31,
1996. Growth in primary capital can be attributed to the retention of
operating earnings after payment of dividends. 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 12 in Notes to Consolidated Financial Statements for
more discussion of regulatory matters.
In 1996, dividends paid to shareholders totaled $0.62 per share compared to the
$0.53 paid in 1995. 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
include 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 $7,628 or 1.2% of total loans at year-end 1996. While levels of
nonperforming assets are susceptible to increases resulting from fluctuations
in the economy, Horizon works to keep its level of nonperforming assets at a
relatively low level as demonstrated in Table 12.
Loans ninety days past due and accruing interest were 0.59% of total loans at
year-end 1996 compared to 0.52% and 0.41% at year-end 1995 and 1994. Although
not significant, the level of loans past due more than ninety days has
increased consistent with national consumer debt past-due trends. As previously
stated, Horizon has tightened consumer lending underwriting standards.
Nonaccrual loans are noninterest earning assets reported in accordance with
regulatory or generally accepted accounting standards. They are loans 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 balance of the loans
is transferred to "Other Real Estate Owned" (OREO) upon repossession 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.
34
<PAGE> 16
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
NONPERFORMING LOANS
<TABLE>
<CAPTION>
Allowance for Nonperforming
Loan Losses Loans
<S> <C> <C>
1992 $6.4 $7.2
1993 $7.3 $9.6
1994 $8.2 $5.9
1995 $8.5 $7.8
1996 $9.6 $7.2
</TABLE>
The amount of loans not accruing interest decreased $1,090 or 23.9% at December
31, 1996, from the level reported in 1995. At December 31, 1996, these loans
constituted 0.55% of total loans compared to 0.73% and 0.60% at December 31,
1995 and 1994, respectively. The fluctuations from 1994 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 $434 at December 31, 1996, a decrease of $124
or 22.29% from $558 at December 31, 1995. This follows a decline of $465 or
45.5% from 1994 to 1995. 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 includes a deterioration in the fair
value.
<TABLE>
<CAPTION>
TABLE 12
ANALYSIS OF ASSET QUALITY
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $3,466 $4,556 $3,473 $ 8,397 $ 3,143
Loans ninety days past due and accruing interest 3,728 3,243 2,403 1,219 2,494
Restructured loans - - - - 1,609
----------------------------------------------------------
Total nonperforming loans 7,194 7,799 5,876 9,616 7,246
Other real estate owned 434 558 1,023 1,050 2,434
Insubstance foreclosures - - 88 - 483
----------------------------------------------------------
Total nonperforming assets $7,628 $8,357 $6,987 $10,666 $10,163
==========================================================
Nonperforming loans to total loans 1.13% 1.26% 1.01% 1.81% 1.47%
Nonperforming assets to total assets 0.81% 0.89% 0.79% 1.23% 1.20%
Allowance for loan losses to nonperforming loans 133.54% 109.27% 138.75% 75.93% 88.46%
</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 allowance is an
estimate and requires management to make assumptions 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 condition and market trends. Management
considers the allowance for loan losses adequate to absorb possible losses from
loans.
35
<PAGE> 17
At December 31, 1996, the allowance for loan losses was $9,607 or 1.52% of
total year-end loans. This ratio is a 10.9% increase from the prior year's
1.37% and an 8.6% increase from the 1.40% at December 31, 1994. A summary of
the allowance for loan losses allocated by type of loan is included in Table
14. Table 15, Allowance for Loan Losses, provides 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.
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
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------
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 $4,318 35% $3,600 33% $2,960 30% $3,353 31% $3,129 29%
Real estate - 200 1% 328 1% 507 1% 498 2% - 1%
construction
Real estate -
residential 1,337 36% 1,350 36% 1,337 39% 1,296 38% 1,363 43%
Consumer loans 3,145 28% 2,639 30% 2,651 30% 1,784 29% 1,844 27%
Unallocated 607 - 605 - 698 - 370 - 74 -
---------------------------------------------------------------------------------------------------------
Total $9,607 100% $8,522 100% $8,153 100% $7,301 100% $6,410 100%
=========================================================================================================
</TABLE>
The provision for loan losses in 1996 was $3,334, up from the $2,505 provision
in 1995 and the $2,264 provision in 1994. The increase in 1996 was in response
to growth in the loan portfolio, increased consumer delinquencies, significant
allocation for a single commercial credit in the latter part of 1996, and
Horizon's continual evaluation of the adequacy of the allowance for loan
losses.
PROVISION FOR LOAN LOSSES/
NET CHARGE-OFFS
<TABLE>
<CAPTION>
Provisions for Net
Loan Losses Charge-offs
----------- -----------
<S> <C> <C>
1992 $3.0 $1.7
1993 $2.3 $1.4
1994 $2.3 $1.4
1995 $2.5 $2.1
1996 $3.3 $2.3
</TABLE>
Net charge-offs in 1996 increased $113 or 5.3% from 1995. This increase follows
an increase of $724 or 51.3% in 1995 from 1994 net charge-offs. Net charge-offs
as a percentage of average total loans were unchanged at 0.36% in 1996 and
1995, compared to 0.26% in 1994. 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 and adverse changes in
the economic conditions. These factors were considered in determining the
adequacy of the allowance for loan losses which, at December 31, 1996, was
sufficient to absorb nearly five times the amount of net charge-offs
experienced during 1996.
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.
36
<PAGE> 18
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE 14
ALLOWANCE FOR LOAN LOSSES
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $8,522 $8,153 $7,301 $6,410 $5,173
Provision for loan losses 3,334 2,505 2,264 2,337 2,962
Loans charged-off:
Commercial 1,432 1,039 579 1,158 1,072
Real estate 61 89 191 461 401
Revolving credit 414 214 188 41 22
Other consumer 1,729 1,447 1,122 942 981
-------------------------------------------------------------------
Total 3,636 2,789 2,080 2,602 2,476
Recoveries:
Commercial 775 101 199 706 260
Real estate 25 22 38 102 124
Revolving credit 59 42 23 8 10
Other consumer 528 488 408 340 357
-------------------------------------------------------------------
Total 1,387 653 668 1,156 751
-------------------------------------------------------------------
Net charge-offs 2,249 2,136 1,412 1,446 1,725
-------------------------------------------------------------------
Balance at year end $9,607 $8,522 $8,153 $7,301 $6,410
===================================================================
Percentage of net charge-offs to average loans 0.36% 0.36% 0.26% 0.28% 0.37%
Percentage of allowance for loan losses to total loans 1.52% 1.37% 1.40% 1.37% 1.30%
Earnings coverage of net charge-offs 4.96X 5.38X 7.17X 6.57X 5.14X
</TABLE>
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, 1996. 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.
Marketable and maturing securities have historically been a primary source of
funds to meet customers' liquidity needs. At December 31, 1996, approximately
12.4% of the securities portfolio matures or reprices within one year. At
December 31, 1996, all of the securities held were rated as investment quality
and 82.8% 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 $13,997 during 1996.
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
$125,000, 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 15 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.
37
<PAGE> 19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Another area of consideration in the rate sensitivity area is the fact that at
December 31, 1996, $15,147 in mortgage-backed securities were 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 decreased by 14.3% in 1996
after increasing by 17.7% in 1995. These increases and decreases are due
primarily to changes in other assets and liabilities. In 1996, net cash was
used in financing activities due to the slight decrease in deposits. In 1995
and 1994, net cash was provided by financing activities due to significant
increases in deposits. In 1996, $4,588 net cash was paid in the sale of a
branch (primarily deposits). The net cash has been used in Horizon's investing
activities, primarily in funding loan growth. In 1995, $5,021 was used to
purchase premises and equipment, primarily the construction of a new bank
facility and purchase of computer hardware and software to provide centralized
processing and check imaging. Also, during 1995, Horizon acquired four branches
of a regional bank holding company and received cash, net of cash paid, of
approximately $3,456 in addition to acquiring various loans and deposits.
The major objectives of asset/liability management include achieving adequate
liquidity and maintaining an appropriate level of interest rate risk.
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
which 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 (33.43)% at
December 31, 1996. 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 $326,027, however, a majority are 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, that 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.
<TABLE>
<CAPTION>
TABLE 15
INTEREST SENSITIVITY ANALYSIS
-----------------------------------------------------------------
DECEMBER 31, 1996
------------------------------------------------------------------
1-3 3-6 OVER 6 TOTAL OVER
MONTHS MONTHS MONTHS ONE YEAR ONE YEAR
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Investment securities $ 11,353 $ 4,849 $ 16,643 $ 32,845 $215,819
Total loans 169,110 38,468 74,625 282,203 351,781
Federal funds sold 2,455 - - 2,455 -
------------------------------------------------------------------
Total earning assets 182,918 43,317 91,268 317,503 567,600
Noninterest bearing demand deposits - - - - 119,831(1)
Interest bearing liabilities:
Demand deposits 97,193 - - 97,193 -
Money market deposits 30,474 - - 30,474 -
Savings deposits 198,360 - - 198,360 -
Time deposits 99,217 76,996 102,755 278,968 73,170
Short-term borrowings 29,154 - - 29,154 -
------------------------------------------------------------------
Total interest bearing liabilities 454,398 76,996 102,755 634,149 73,170
------------------------------------------------------------------
Interest sensitivity gap $(271,480) $ (33,679) $ (11,487) $(316,646) $494,430
==================================================================
Cumulative gap $(271,480) $(305,159) $(316,646) $(316,646)
==================================================================
Ratio of interest sensitive assets to interest sensitive 40.26% 56.26% 88.82% 50.07%
liabilities
Ratio of one year cumulative gap to total assets on
December 31, 1996 (33.43)%
</TABLE>
(1) Demand deposits do not bear interest.
38
<PAGE> 20
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
Table 16 summarizes the range of prices of common stock and dividends declared
for each quarter of 1996 and 1995. During 1993, Horizon's stock became listed
on the National Association of Securities Dealers Automated Quotation (NASDAQ)
System under the symbol HZWV.
<TABLE>
<CAPTION>
TABLE 16
--------------------------------------------------------------------------------------------------
QUARTER STOCK PRICE RANGE DIVIDEND DECLARED PER SHARE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
4th Quarter 1996 $19.25-20.75 $0.170
3rd Quarter 1996 $19.25-21.25 $0.150
2nd Quarter 1996 $19.00-22.00 $0.150
1st Quarter 1996 $19.50-22.13 $0.150
4th Quarter 1995 $17.25-21.00 $0.150
3rd Quarter 1995 $14.75-18.00 $0.125
2nd Quarter 1995 $14.00-15.50 $0.125
1st Quarter 1995 $14.00-15.50 $0.125
</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 12 in the consolidated financial statements for restrictions on
subsidiary dividends, the primary source of funds for dividends paid by Horizon
to its shareholders.
During 1995, 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 15, 1997, there were 2,454 holders of record of Horizon common stock.
39
<PAGE> 21
- -------------------------------------------------------------------------------
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, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements of Twentieth
Bancorp, Inc. and subsidiary (Twentieth) which statements reflect total assets
of $317,308 as of December 31, 1995, and total interest income of $23,716 and
$21,014 for the years ended December 31, 1995 and 1994, respectively. 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 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
February 14, 1997
40
<PAGE> 22
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONSOLIDATED
FINANCIAL
STATEMENTS
&
NOTES
HORIZON BANCORP, INC.
41
<PAGE> 23
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,503 $ 35,312
Federal funds sold 2,455 4,675
-------------------------------
Cash and cash equivalents 38,958 39,987
Investment securities:
Available-for-sale at fair value 205,923 188,899
Held-to-maturity (approximate fair value of $43,354 and
$68,130 at December 31, 1996 and 1995) 42,741 67,303
Total loans 633,984 620,570
Less: Allowance for loan losses (9,607) (8,522)
-------------------------------
Net loans 624,377 612,048
Premises and equipment, net 16,580 17,030
Accrued interest receivable and other assets 18,489 17,635
-------------------------------
Total assets $947,068 $942,902
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $119,831 $116,528
Interest bearing 678,165 689,053
-------------------------------
Total deposits 797,996 805,581
Short-term borrowings 29,154 22,186
Accrued interest payable and other liabilities 10,507 10,752
-------------------------------
Total liabilities 837,657 838,519
Shareholders' equity:
Common stock, $1 par value; 20,000 shares authorized and 9,308 shares issued,
including 11 shares in treasury at December 31, 1996; 5,000 authorized and
4,653 issued, including
6 shares in treasury at December 31, 1995 9,308 4,653
Capital surplus 19,757 19,744
Retained earnings 79,876 78,592
Treasury stock, at cost (175) (175)
Unrealized gain on available-for-sale securities 645 1,569
-------------------------------
Total shareholders' equity 109,411 104,383
-------------------------------
Total liabilities and shareholders' equity $947,068 $942,902
===============================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 24
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $57,577 $54,921 $46,505
Interest and dividends on investment securities:
Taxable 12,579 12,185 12,319
Tax-exempt 2,673 2,355 2,556
Federal funds sold and other 810 1,157 851
-------------------------------------
Total interest income 73,639 70,618 62,231
Interest expense:
Deposits 28,424 26,869 21,052
Short-term borrowings 846 731 637
-------------------------------------
Total interest expense 29,270 27,600 21,689
-------------------------------------
Net interest income 44,369 43,018 40,542
Provision for loan losses 3,334 2,505 2,264
-------------------------------------
Net interest income after provision for loan losses 41,035 40,513 38,278
Other income:
Service charges and fees 2,937 2,888 2,553
Trust income 923 887 834
Investment securities losses (79) (131) (533)
Other 1,074 985 740
-------------------------------------
Total other income 4,855 4,629 3,594
Other expenses:
Salaries and employee benefits 12,878 12,567 11,941
Net occupancy and equipment expense 3,624 3,822 3,145
Outside data processing 1,996 1,986 1,795
Federal deposit insurance 11 986 1,811
Advertising 585 758 760
Other 9,495 7,534 7,446
-------------------------------------
Total other expenses 28,589 27,653 26,898
-------------------------------------
Income before income taxes 17,301 17,489 14,974
Applicable income taxes 6,150 6,007 4,849
-------------------------------------
Net income $11,151 $11,482 $10,125
=====================================
Net income per common share $1.20 $1.23 $1.09
=====================================
Average common shares outstanding 9,296 9,298 9,306
=====================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 25
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
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, 1994 $4,653 $19,744 $64,690 $ - $ - $(144) $ 88,943
Adjustment to beginning balance for
change in accounting method, net of
deferred income taxes - - - - 464 - 464
Net income - 1994 - - 10,125 - - - 10,125
Cash dividends declared by pooled
companies:
Horizon ($.49 per share) - - (2,752) - - - (2,752)
Twentieth - - (900) - - - (900)
Reduction in ESOP indebtedness - - - - - 23 23
Change in unrealized gain (loss) on
available-for-sale securities, net of
deferred income taxes - - - - (3,011) - (3,011)
------------------------------------------------------------------------------------
Balances at December 31, 1994 4,653 19,744 71,163 - (2,547) (121) 92,892
Net income - 1995 - - 11,482 - - - 11,482
Cash dividends declared by pooled
companies:
Horizon ($.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 gain (loss) 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 - 1996 11,151 11,151
Cash dividends declared by pooled
companies:
Horizon ($.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 (loss) on
available-for-sale securities, net of - - - - (924) - (924)
deferred income taxes
------------------------------------------------------------------------------------
Balances at December 31, 1996 $9,308 $19,757 $79,876 $(175) $ 645 $ - $109,411
====================================================================================
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 26
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
HORIZON BANCORP, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $11,151 $11,482 $10,125
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 1,524 1,669 1,236
Provision for loan losses 3,334 2,505 2,264
Deferred income tax benefit (971) (786) (827)
Amortization 618 758 1,225
Deferred compensation expense 420 490 470
Loss on sale of investment securities 79 131 533
Gain on sale of assets (48) - -
Change in accrued interest receivable and other assets 136 (1,075) (159)
Change in accrued interest payable and other liabilities (665) 3,011 578
------------------------------------
Net cash provided by operating activities 15,578 18,185 15,445
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities 24,907 4,818 17,341
Proceeds from maturities of available-for-sale securities 40,524 14,624 16,544
Purchases of available-for-sale securities (66,213) (59,163) (43,289)
Proceeds from maturities of held-to-maturity securities 19,527 42,535 65,269
Purchases of held-to-maturity securities (12,845) (15,677) (26,636)
Net increase in loans (15,663) (23,423) (52,857)
Purchases of premises and equipment (1,258) (5,021) (1,579)
Cash received in purchase of branches, net of cash paid - 3,456 -
Cash paid in sale of branch, net of cash received (4,588) - -
------------------------------------
Net cash used in investing activities (15,609) (37,851) (25,207)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (2,767) 21,979 13,816
Payments on long-term borrowing - - (800)
Increase in short-term borrowings 6,968 2,146 895
Cash dividends paid (5,213) (4,053) (3,652)
Cash received in stock transactions, net of cash paid 14 - -
Acquisition of treasury shares - (175) -
------------------------------------
Net cash (used in) provided by financing activities (998) 19,897 10,259
------------------------------------
Net (decrease) increase in cash and cash equivalents (1,029) 231 497
Cash and cash equivalents at beginning of year 39,987 39,756 39,259
------------------------------------
Cash and cash equivalents at end of year $38,958 $39,987 $39,756
====================================
</TABLE>
See notes to consolidated financial statements.
45
<PAGE> 27
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
HORIZON BANCORP, INC.
DECEMBER 31, 1996
(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. Such financial statements have been restated
to reflect the merger of Twentieth Bancorp, Inc. into Horizon on August 31,
1996, under the pooling of interests method of accounting. 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 adequate by
management 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 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.
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.
46
<PAGE> 28
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 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. Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of the remaining unpaid
principal balance. 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 agreements. Estimated amounts to be paid under the
deferred compensation and supplemental retirement agreements are accrued over
the period of the employee's or director's active employment from the time the
agreement is signed to the employee or director's full eligibility date.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, is applicable to Horizon in 1996. This Statement defines a fair
value based method of accounting for stock-based compensation plans with the
option of continuing to account for such plans on the intrinsic value method.
As permitted, Horizon has continued to apply the intrinsic value method to
account for stock-based compensation.
NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number of
common shares outstanding during the applicable period.
In October 1996, Horizon's Board of Directors authorized a two-for-one stock
split effected in the form of a 100% stock dividend to shareholders of record
on December 1, 1996. Average shares outstanding and per share amounts included
in the consolidated financial statements and notes have been adjusted for the
stock split.
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (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 is not expected to have a material impact on
Horizon's financial statements.
2. MERGER AND ACQUISITIONS
In August 1996, Horizon acquired all of the outstanding common stock of
Twentieth Bancorp, Inc. (Twentieth), headquartered in Huntington, West
Virginia. Horizon exchanged 1.01 shares of its common stock for each share of
Twentieth's common stock
47
<PAGE> 29
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
outstanding. Approximately 1,818 shares of Horizon common stock were issued.
This business combination was accounted for as a pooling of interests. The
pooling of interests method requires the combining of the financial information
of the merging companies as though they had always been combined. The following
is a summary of the results of the separate companies.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income:
Horizon $14,807 $28,423 $26,644
Twentieth 7,075 14,595 13,898
-------------------------------------------------------
Combined $21,882 $43,018 $40,542
=======================================================
Net income:
Horizon $ 4,246 $ 8,071 $ 6,971
Twentieth 1,185 3,411 3,154
-------------------------------------------------------
Combined $ 5,431 $11,482 $10,125
=======================================================
Net income per common share:
Horizon $0.75 $1.42 $1.23
Twentieth 0.33 0.95 0.88
Combined 0.58 1.23 1.09
</TABLE>
In connection with the merger, Horizon and Twentieth engaged investment banking
firms to independently advise them and to provide fairness opinions on the
transaction. Total fees paid to investment bankers of approximately $1,000 are
included in other expenses.
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. The excess
of purchase price over the fair value of the net assets acquired (goodwill) of
approximately $3,800 is being amortized on a straight-line basis over 10 years.
Accumulated amortization approximated $2,700 and $2,300 at December 31, 1996
and 1995, respectively.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are as
follows:
<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>
48
<PAGE> 30
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
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 $136,899 $2,574 $(384) $139,089
Obligations of states and political subdivisions 11,323 175 (16) 11,482
Mortgage-backed securities 18,887 191 (117) 18,961
Other equity securities 19,241 151 (25) 19,367
--------------------------------------------------------------
Totals $186,350 $3,091 $(542) $188,899
==============================================================
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations of U.S.
government agencies and corporations $ 31,057 $ 179 $ (5) $ 31,231
Obligations of states and political subdivisions 36,146 823 (170) 36,799
Other debt securities 100 - - 100
--------------------------------------------------------------
Totals $ 67,303 $1,002 $(175) $ 68,130
==============================================================
</TABLE>
In accordance with provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
Horizon chose to reclassify securities held by Twentieth 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 on Statement No.
115. 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, 1996, 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 $ 31,973 $ 32,041
Due after one year but through five years 107,312 107,975
Due after five years but through ten years 42,343 42,691
Due after ten years 7,987 8,069
Mortgage-backed securities 15,219 15,147
----------------------------------
$204,834 $205,923
==================================
HELD-TO-MATURITY
Due in one year or less $ 804 $ 808
Due after one year but through five years 10,928 11,143
Due after five years but through ten years 21,770 22,067
Due after ten years 9,239 9,336
----------------------------------
$ 42,741 $ 43,354
==================================
</TABLE>
During the years ended December 31, 1996, 1995, and 1994, available-for-sale
securities with a fair value at the date of sale of $24,900, $4,800, and
$17,300 were sold. The gross realized gains on such sales totaled $20, $0, and
$12 and the gross realized losses totaled $99, $131, and $545 in 1996, 1995,
and 1994.
At December 31, 1996 and 1995, investment securities with carrying amounts of
$44,817 and $45,691, respectively, were pledged to secure public deposits,
repurchase agreements, and for other purposes as required or permitted by law.
49
<PAGE> 31
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
Commercial $218,714 $203,524
Real estate - construction 8,065 4,873
Real estate - mortgage 228,447 227,376
Consumer loans 178,758 184,797
----------------------------------
Total loans 633,984 620,570
Less allowance for loan losses (9,607) (8,522)
----------------------------------
Net loans $624,377 $612,048
==================================
</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 rates 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
1996:
<TABLE>
<S> <C>
Balance at January 1, 1996 $15,267
Loans made 5,780
Principal collected (5,155)
Other changes 825
------------
Balance at December 31, 1996 $16,717
============
</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>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $8,522 $8,153 $7,301
Charge-offs (3,636) (2,789) (2,080)
Recoveries 1,387 653 668
----------------------------------------
Net charge-offs (2,249) (2,136) (1,412)
Provision for loan losses 3,334 2,505 2,264
----------------------------------------
Balance at end of year $9,607 $8,522 $8,153
========================================
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans that are
considered to be impaired approximated $5,700 and $7,300 (of which $1,600 and
$3,400 were on a nonaccrual basis). Included in this amount are $2,600 and
$3,400 of impaired loans for which the related allowance for loan losses is
$790 and $940; and $3,100 and $3,900 of impaired loans that, as a result of
write-downs or being well secured, do not have an allowance for loan losses.
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995, approximated $7,300 and $6,500. For the years ended
December 31, 1996 and 1995, Horizon recognized interest income on those
impaired loans of $440 and $430, which included $400 and $430 of interest
income recognized using the cash basis method of income recognition.
50
<PAGE> 32
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
The major categories of premises and equipment and related accumulated
depreciation are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Land $ 2,791 $ 2,823
Building and improvements 17,065 16,992
Furniture and equipment 12,678 11,869
-----------------------------
32,534 31,684
Less accumulated depreciation (15,954) (14,654)
-----------------------------
$16,580 $17,030
=============================
</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: 1997--$175; 1998--$75; 1999--$25; 2000--$25;
2001--$25 with $1,100 of commitments extending beyond 2001.
Total rent expense, including cancelable and noncancelable leases, approximated
$200, $175, and $100 in 1996, 1995, and 1994, respectively.
7. DEPOSITS
Interest bearing deposits include various time deposit products. Time deposits
with remaining terms of more than one year at December 31, 1996, have aggregate
maturities of $278,968 in 1997, $36,627 in 1998, $11,357 in 1999, $2,720 in
2000, and $2,896 in 2001. At December 31, 1996 and 1995, time deposits
exceeding $100 approximated $65,173 and $59,843.
Interest paid on deposits and short-term borrowings approximated $29,700,
$25,400, and $21,700 in 1996, 1995, and 1994, respectively.
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, 1996, Horizon is
entitled to receive approximately $125,000 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 4.5% and 3.8% at December 31, 1996 and 1995.
51
<PAGE> 33
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9. 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
1996 1995
---------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $3,627 $2,681
Accrued employee benefits 1,614 1,381
Other 95 145
---------------------------
Total deferred tax assets 5,336 4,207
Deferred tax liabilities:
Available-for-sale securities 442 986
Premises and equipment 542 468
Other 248 164
---------------------------
Total deferred tax liabilities 1,232 1,618
---------------------------
Net deferred tax assets $4,104 $2,589
===========================
</TABLE>
The applicable income tax provisions included in the consolidated statements of
income are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Current:
Federal $6,040 $5,822 $4,846
State 1,081 971 830
-----------------------------------------
Total current 7,121 6,793 5,676
Deferred:
Federal (830) (688) (717)
State (141) (98) (110)
-----------------------------------------
Total deferred (971) (786) (827)
-----------------------------------------
Total $6,150 $6,007 $4,849
=========================================
</TABLE>
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>
1996 1995 1994
AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory federal rate $6,055 35.0% $6,121 35.0% $5,091 34.0%
Plus: State income tax, net of federal tax benefits 611 3.5 570 3.3 473 3.2
------------------------------------------------------------
6,666 38.5 6,691 38.3 5,564 37.2
(Decrease) increase in taxes resulting from:
Tax-exempt interest (911) (5.3) (840) (4.8) (890) (5.9)
Other - net 395 2.3 156 0.8 175 1.1
------------------------------------------------------------
$6,150 35.5% $6,007 34.3% $4,849 32.4%
============================================================
</TABLE>
Income taxes relating to securities transactions approximated $(32), $(54),
and $(213) in 1996, 1995, and 1994, respectively.
Income taxes paid approximated $6,800, $6,750, and $5,200 in 1996, 1995, and
1994, respectively.
10. 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.
52
<PAGE> 34
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The following table sets forth the Plan's funded status and amounts recognized
in Horizon's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation $ 5,202 $ 4,891
Nonvested benefit obligation 185 475
---------------------------
Accumulated benefit obligation 5,387 5,366
Effect of estimated future compensation increases 2,140 2,089
---------------------------
Projected benefit obligation 7,527 7,455
Plan assets at fair value 6,766 6,133
---------------------------
Projected benefit obligation in excess of plan assets (761) (1,322)
Unrecognized prior service cost 1,277 1,410
Unrecognized net asset at transition, net of amortization (346) (377)
Unrecognized net gain from past experience different from that assumed (1,420) (784)
---------------------------
Accrued pension cost included in other liabilities $(1,250) $(1,073)
===========================
</TABLE>
Following is a summary of the components of net periodic pension cost:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $513 $463 $478
Interest cost on projected benefit obligation 547 485 435
Actual (return) loss on plan assets (863) (970) 15
Net amortization and deferral 368 558 (440)
--------------------------------------
Net periodic pension cost $565 $536 $488
======================================
</TABLE>
Assumptions used in the accounting for defined benefit plans were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.75% 7.50% 8.50%
Rate of increase in future compensation levels 6.00% 6.00% 6.00%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
</TABLE>
Plan assets consist principally of U.S. Government securities, corporate stocks
and bonds, and other short-term investments.
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 $420, $490,
and $470 during 1996, 1995, and 1994. The liability for such agreements
approximated $2,440 and $2,020 at December 31, 1996 and 1995, 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 $2,900 and $2,700
at December 31, 1996 and 1995, 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.
11. STOCK OPTION PLAN
Horizon has an incentive stock option plan for certain key employees. Pursuant
to this plan, an aggregate maximum of 200 shares of common stock were reserved
for issuance, however, no more than 20 options may be issued in any calendar
year. All options granted have five year terms and vest over a three year
period.
53
<PAGE> 35
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
As permitted, Horizon has adopted the disclosure only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Pro forma net income and earnings per share have not been
included herein because the effect of applying the fair value method prescribed
by Statement No. 123 to options awarded produces amounts that are not
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>
1996 1995
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------------------------- -----------------------------
(000's) (000's)
<S> <C> <C> <C> <C>
Outstanding at beginning of year 56 $16.50 40 $14.50
Granted 20 20.00 20 20.00
Exercised (1) 14.75 - -
Forfeited - - (4) 14.75
-------------- --------------
Outstanding at end of year 75 $17.00 56 $16.50
============== ==============
Exercisable at end of year 17 $14.50 7 $14.75
============== ==============
Weighted-average fair value of options granted
during the year $20.00 $20.00
============== ==============
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged from
$14.25 to $20.00. The weighted-average remaining contractual life of those
options is 3.6 years.
12. 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, 1996, was approximately
$8,500.
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, 1996, that Horizon and its banking subsidiaries
meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, 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.
54
<PAGE> 36
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Horizon and its three significant subsidiaries' actual capital amounts and
ratios are presented in the following table.
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
--------------------- ---------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk-Weighted Assets):
Horizon Bancorp $115,917 17.8% $52,241 =>8.0% $65,302 =>10.0%
Bank of Raleigh 38,949 15.6% 19,942 =>8.0% 24,927 =>10.0%
Twentieth Street Bank 34,787 17.1% 16,296 =>8.0% 20,370 =>10.0%
Greenbrier Valley National Bank 18,808 16.8% 8,937 =>8.0% 11,172 =>10.0%
Tier I Capital (to Risk-Weighted Assets):
Horizon Bancorp 107,754 16.5% 26,121 =>4.0% 39,181 =>6.0%
Bank of Raleigh 35,833 14.4% 9,971 =>4.0% 14,956 =>6.0%
Twentieth Street Bank 32,241 15.8% 8,148 =>4.0% 12,222 =>6.0%
Greenbrier Valley National Bank 17,412 15.6% 4,469 =>4.0% 6,703 =>6.0%
Tier I Capital (to Average Assets):
Horizon Bancorp 107,754 11.4% 37,698 =>4.0% 47,122 =>5.0%
Bank of Raleigh 35,833 11.4% 12,538 =>4.0% 15,672 =>5.0%
Twentieth Street Bank 32,241 10.0% 12,939 =>4.0% 16,174 =>5.0%
Greenbrier Valley National Bank 17,412 10.1% 6,885 =>4.0% 8,606 =>5.0%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk-Weighted Assets):
Horizon Bancorp $108,838 18.5% $47,054 =>8.0% $58,817 =>10.0%
Bank of Raleigh 36,596 15.6% 18,749 =>8.0% 23,436 =>10.0%
Twentieth Street Bank 33,609 16.1% 16,718 =>8.0% 20,897 =>10.0%
Greenbrier Valley National Bank 17,526 17.0% 8,232 =>8.0% 10,290 =>10.0%
Tier I Capital (to Risk-Weighted Assets):
Horizon Bancorp 101,486 17.2% 23,527 =>4.0% 35,290 =>6.0%
Bank of Raleigh 33,666 14.4% 9,374 =>4.0% 14,062 =>6.0%
Twentieth Street Bank 31,609 15.1% 8,359 =>4.0% 12,538 =>6.0%
Greenbrier Valley National Bank 16,240 15.8% 4,116 =>4.0% 6,174 =>6.0%
Tier I Capital (to Average Assets):
Horizon Bancorp 101,486 11.1% 36,680 =>4.0% 45,850 =>5.0%
Bank of Raleigh 33,666 11.2% 12,011 =>4.0% 15,014 =>5.0%
Twentieth Street Bank 31,609 9.9% 12,807 =>4.0% 16,009 =>5.0%
Greenbrier Valley National Bank 16,240 9.9% 6,588 =>4.0% 8,234 =>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 1996, the
subsidiary banks' net retained profits available for distribution to Horizon as
dividends, without regulatory approval, approximate $10,000, plus net income
for the interim period through the date of declaration.
13. 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.
55
<PAGE> 37
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 $5,100 and $6,000 at December 31, 1996 and 1995.
LOAN COMMITMENTS--At December 31, 1996 and 1995, Horizon had commitments
outstanding to extend credit at prevailing market rates approximating
$104,000 and $75,000. 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.
14. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------
<S> <C> <C>
Cash $ 820 $ 569
Investment in subsidiary banks 104,145 100,552
Investment securities 1,016 1,058
Premises and equipment 699 791
Receivable from consolidated subsidiary banks 625 -
Other assets 2,142 1,672
-------------------------------
Total assets $109,447 $104,642
===============================
Liabilities $ 36 $ 259
Shareholders' equity 109,411 104,383
-------------------------------
Total liabilities and shareholders' equity $109,447 $104,642
===============================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary banks $ 8,164 $ 6,858 $ 5,503
Interest income on investment securities 67 49 13
Operating expenses (2,290) (1,430) (922)
-------------------------------------------
Income before income tax and equity in undistributed
earnings of subsidiary banks 5,941 5,477 4,594
Income tax benefit 704 449 250
-------------------------------------------
Income before equity in undistributed
earnings of subsidiary banks 6,645 5,926 4,844
Equity in undistributed earnings of subsidiary banks 4,506 5,556 5,281
-------------------------------------------
Net income $11,151 $11,482 $10,125
===========================================
</TABLE>
56
<PAGE> 38
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $11,151 $11,482 $10,125
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 602 477 72
Equity in undistributed earnings of subsidiary banks (4,506) (5,556) (5,281)
(Increase) decrease in receivables from consolidated subsidiary banks (625) 157 604
(Increase) decrease in other assets (810) (542) 31
(Decrease) increase in other liabilities (223) (468) 228
-------------------------------------------
Net cash provided by operating activities 5,589 5,550 5,779
Investing activities:
Purchases of premises and equipment (162) (1,196) -
Maturities of investment securities 250 - -
Sales of investment securities 149 - -
Purchases of investment securities (376) (602) (450)
-------------------------------------------
Net cash used in investing activities (139) (1,798) (450)
Financing activities:
Cash dividends paid (5,213) (4,053) (3,652)
Payments on long-term borrowing - - (800)
Acquisition of treasury shares - (175) -
Cash received in stock transactions, net of cash paid 14 - -
-------------------------------------------
Net cash used in financing activities (5,199) (4,228) (4,452)
-------------------------------------------
Net increase (decrease) in cash 251 (476) 877
Cash at beginning of year 569 1,045 168
-------------------------------------------
Cash at end of year $ 820 $ 569 $ 1,045
===========================================
</TABLE>
15. 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 analyses 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.
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.
57
<PAGE> 39
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 approximate their carrying value. The estimated fair values
of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 38,958 $ 38,958 $ 39,987 $ 39,987
Investment securities 248,664 249,277 256,202 257,029
Loans 624,377 625,504 612,048 611,883
Financial liabilities:
Deposits 797,996 800,480 805,581 808,184
Short-term borrowings 29,154 29,154 22,186 22,186
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for 1996 and 1995 is as follows:
<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
Earnings per share 0.30 0.28 0.30 0.32
Average common shares outstanding 9,296 9,296 9,296 9,297
</TABLE>
<TABLE>
<CAPTION>
1995
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $16,637 $17,340 $18,242 $18,399
Interest expense 5,995 6,798 7,438 7,369
Net interest income 10,642 10,542 10,804 11,030
Provision for loan losses 507 466 564 968
Securities losses, net (131) - - -
Net income 2,984 2,883 3,026 2,589
Earnings per share 0.32 0.31 0.33 0.28
Average common shares outstanding 9,307 9,294 9,296 9,296
</TABLE>
58
<PAGE> 40
- -------------------------------------------------------------------------------
SHAREHOLDERS' INFORMATION
- -------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders of Horizon Bancorp, Inc. will be held on
April 22, 1997, at The Greenbrier, White Sulphur Springs, West Virginia at
4:00 p.m.
EXECUTIVE OFFICES
Horizon Bancorp, Inc.
One Park Avenue
Beckley, West Virginia 25802-2803
(304) 255-7000
INDEPENDENT AUDITORS
Ernst & Young LLP
900 United Center
Charleston, West Virginia 25301
FINANCIAL STATEMENTS
During the year, Horizon distributes three interim quarterly financial reports
and an annual report. Additionally, Horizon files an annual report on Form 10-K
and quarterly reports on Form 10-Q with the Securities and Exchange Commission.
Copies of these reports may be obtained without charge upon written request to:
Mark L. Anderson
Post Office Box D
Beckley, West Virginia 25802-2803
(304) 255-7307
CONTACTS
Analysts, portfolio managers, and others seeking financial information about
Horizon Bancorp, Inc. should contact:
C. Duane Blankenship
Post Office Box D
Beckley, West Virginia 25802-2803
(304) 255-7310
Stock Transfer Agent
Harris Trust and Savings Bank
Attn: Shareholder Services Division
311 West Monroe Street
Post Office Box A-3504
Chicago, Illinois 60690-3504
(312) 461-3309
STOCK LISTING
Horizon's common stock is traded on the NASDAQ National Market System with a
ticker symbol of HZWV.
NASDAQ Market Makers:
Wheat First Securities
The Robinson-Humphrey Co., Inc.
Sandler O'Neill & Partners
NATURE OF BUSINESS
Horizon is a West Virginia multibank holding company with five affiliate banks
and twenty locations in southern West Virginia.
EXECUTIVE OFFICERS
Frank S. Harkins, Jr.
Chairman of the Board and CEO
Philip L. McLaughlin
President and COO
C. Duane Blankenship
Vice President and CFO
E.M. Payne, III
Secretary
David W. Hambrick
Executive Vice President
Bernard C. McGinnis, III
Executive Vice President
59
<PAGE> 41
- -------------------------------------------------------------------------------
DIRECTORS
HORIZON BANCORP, INC. AND AFFILIATES
HORIZON BANCORP, INC.
DIRECTORS
Frank S. Harkins, Jr.
Chairman of the Board and
Chief Executive Officer
Philip L. McLaughlin
President and Chief Operating Officer
David W. Hambrick
Executive Vice President
B. C. McGinnis, III
Executive Vice President
E. M. Payne, III
John M. Alderson, IV
Jack G. Bazemore
Joseph M. Blankenship
W. H. File, III
Phillip W. Cain
Sharon H. Rowe
Tracy W. Hylton, II
Robert L. Kosnoski
William C. Dolin
Clarence E. Martin
Jack McGinnis
Thomas L. McGinnis
Harper W. Nelson
Rodney H. Pack
R. T. Rogers
James E. Songer
Albert M. Tieche, Jr.
Thomas E. Lilly
Carolyn H. McCulloch
- -------------------------------------------------------------------------------
DIRECTORS OF BANK OF RALEIGH
Carolyn H. McCulloch
Chairman of the Board
Frank S. Harkins, Jr.
President and Chief Executive Officer
Charles S. Houck
Executive Vice President
W. H. File, III
Tracy W. Hylton, II
Robert L. Kosnoski
Thomas E. Lilly
Susan S. Landis
Philip L. McLaughlin
E. M. Payne, III
James E. Songer
Albert M. Tieche, Jr.
James E. Songer, II
Scott H. McCulloch
- -------------------------------------------------------------------------------
DIRECTORS OF FIRST NATIONAL BANK IN MARLINTON
William E. Kane
Chairman of the Board
and President
Harry J. Widney
Vice President and Vice
Chairman of the Board
Phillip W. Cain
Executive Vice President
and Chief Executive Officer
James E. Baxter
David W. Hambrick
Dolan Irvine
John R. LaRue
Philip L. McLaughlin
Louise B. McNeel
Harper W. Nelson
Jimmie A. Ryder, Sr.
- -------------------------------------------------------------------------------
DIRECTORS OF GREENBRIER VALLEY NATIONAL BANK
Norman B. Ream, Jr.
Chairman of the Board
Philip L. McLaughlin
President and Chief Executive Officer
David W. Hambrick
Executive Vice President
John M. Alderson, IV
John Wade Bell, III
L. Wade Griffith
Jesse O. Guills
Frank S. Harkins, Jr.
James A. King
Rodney H. Pack
Robert E. Grist
Sharon H. Rowe
Don R. Smathers
John R. Wilson, D.V.M.
- -------------------------------------------------------------------------------
DIRECTORS OF NATIONAL BANK OF SUMMERS OF HINTON
J. Campbell Gwinn
Chairman of the Board
R. T. Rogers
Vice Chairman of the Board
Joseph M. Blankenship
President and Chief
Executive Officer
James G. Dillon
Frank S. Harkins, Jr.
Jack L. Hellems
Victor G. Morgan
J. M. O'Bryan
Leon Ray Pivont
Earl R. Turner
- -------------------------------------------------------------------------------
DIRECTORS OF THE TWENTIETH STREET BANK
B. C. McGinnis, III
President
Thomas L. McGinnis
Executive Vice President
Jack G. Bazemore
William C. Dolin
Frank S. Harkins, Jr.
Clarence E. Martin
Jack McGinnis
Philip L. McLaughlin
60
<PAGE> 42
MEMBER BANKS AND LOCATIONS
BANK OF RALEIGH
Offices:
One Park Avenue, Beckley
Main and South Kanawha Streets, Beckley
Crossroads Mall, Bradley
Krogers, Beaver
Krogers, Lester Square, Sophia
Krogers, Fountain Square, Oak Hill
NATIONAL BANK OF SUMMERS OF HINTON
Offices:
Temple Street, Hinton
Stokes Drive, Hinton
THE TWENTIETH STREET BANK
Offices:
Third Avenue and Twentieth Street, Huntington
Fifth Avenue and Nineteenth Street, Huntington
Route 60 East, Huntington
Church Street, Milton
Lynn Avenue, Hamlin
Sheridan Street and Shelton Avenue, West Hamlin
GREENBRIER VALLEY NATIONAL BANK
Offices:
Alta Drive, Route 12, Alderson
109 South Jefferson Street, Lewisburg
28 Main Street, Rainelle
709 Nicholas Street, Rupert
Krogers, Fairlea
FIRST NATIONAL BANK IN MARLINTON
Office:
300 Eighth Street, Marlinton
HORIZON BANCORP, INC. IS AN AFFILIATION OF COMMUNITY BANKS, BOUND
TOGETHER BY A COMMON GOAL OF ENHANCING SHAREHOLDER VALUE BY COMPETING MORE
EFFECTIVELY IN THE FINANCIAL MARKET PLACE.
61
<PAGE> 1
EXHIBIT (21) - SUBSIDIARIES OF REGISTRANT
Bank of Raleigh, a state banking corporation wholly owned by registrant.
National Bank of Summers of Hinton, a national banking corporation wholly
owned by registrant.
Greenbrier Valley National Bank, a national banking corporation wholly
owned by registrant.
First National Bank in Marlinton, a national banking corporation wholly
owned by registrant.
The Twentieth Street Bank, a state banking corporation wholly owned by
registrant.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Horizon Bancorp, Inc. and Subsidiaries of our report dated February 14,
1997, included in the 1996 Annual Report to Shareholders of Horizon Bancorp,
Inc. and Subsidiaries.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the Incentive Stock Option Plan (Form S-8, No.
33-73926) and the Dividend Reinvestment Plan (Form S-3, No. 33-61695) of
Horizon Bancorp, Inc. of our report dated February 14, 1997, with respect to
the consolidated financial statements of Horizon Bancorp, Inc. and Subsidiaries
incorporated by reference in the Annual Report on Form 10-K for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
March 25, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Horizon Bancorp, Inc. and Subsidiaries of our report dated February 12,
1996, with respect to the consolidated financial statements of Twentieth
Bancorp, Inc. and Subsidiary.
We also consent to the incorporation by reference in the Registration Statements
pertaining to the Incentive Stock Option Plan (Form S-8, No. 33-73926) and the
Dividend Reinvestment Plan (Form S-3, No. 33-61695) of Horizon Bancorp, Inc. of
our report dated February 12, 1996, with respect to the consolidated financial
statements of Twentieth Bancorp, Inc. and Subsidiary incorporated by reference
in this Form 10-K for the year ended December 31, 1996.
/s/ DIAMOND, LEFTWICH, GOHEEN & DUNN
------------------------------------
Huntington, West Virginia
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1996, consolidated financial statements and notes and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 36,503
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,455
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,923
<INVESTMENTS-CARRYING> 42,741
<INVESTMENTS-MARKET> 43,354
<LOANS> 633,984
<ALLOWANCE> 9,607
<TOTAL-ASSETS> 947,068
<DEPOSITS> 797,996
<SHORT-TERM> 29,154
<LIABILITIES-OTHER> 10,507
<LONG-TERM> 0
9,308
0
<COMMON> 0
<OTHER-SE> 100,103
<TOTAL-LIABILITIES-AND-EQUITY> 947,068
<INTEREST-LOAN> 57,577
<INTEREST-INVEST> 15,252
<INTEREST-OTHER> 810
<INTEREST-TOTAL> 73,639
<INTEREST-DEPOSIT> 28,424
<INTEREST-EXPENSE> 29,270
<INTEREST-INCOME-NET> 44,369
<LOAN-LOSSES> 3,334
<SECURITIES-GAINS> (79)
<EXPENSE-OTHER> 28,589
<INCOME-PRETAX> 17,301
<INCOME-PRE-EXTRAORDINARY> 17,301
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,151
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.85
<YIELD-ACTUAL> 5.30
<LOANS-NON> 3,466
<LOANS-PAST> 3,728
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,522
<CHARGE-OFFS> 3,636
<RECOVERIES> 1,387
<ALLOWANCE-CLOSE> 9,607
<ALLOWANCE-DOMESTIC> 9,607
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 607
</TABLE>
