HORIZON BANCORP
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission file number 0-10792
Registrant’s telephone number, including area code: (219) 879-0211
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
3,111,512 at May 6, 2005
PART 1 — FINANCIAL INFORMATION
See notes to condensed consolidated financial statements
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Horizon Bancorp and SubsidiariesCondensed Consolidated Statements of Income(Dollar Amounts in Thousands, Except Per Share Data)
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Horizon Bancorp and SubsidiariesConsolidated Statement of Stockholders’ Equity(Unaudited)(Table Dollar Amounts in Thousands)
See notes to condensed consolidated financial statements.
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Horizon Bancorp and SubsidiariesCondensed Consolidated Statements of Cash Flows(Dollar Amounts in Thousands)
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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Table Dollar Amounts in Thousands)
Note 1 — Accounting Policies
The accompanying consolidated financial statements include the accounts of Horizon Bancorp (Horizon) and its wholly-owned subsidiaries, Horizon Bank, N.A. (Bank), and HBC Insurance Group, Inc. HBC Insurance Group was liquidated during 2004. All intercompany balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2005 and March 31, 2004 are not necessarily indicative of the operating results for the full year of 2005 or 2004. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Form 10-K annual report for 2004 filed with the Securities and Exchange Commission. The consolidated balance sheet of Horizon as of December 31, 2004 has been derived from the audited balance sheet of Horizon as of that date.
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In August 2002, substantially all of the participants in Horizon’s Stock Option and Stock Appreciation Rights Plans voluntarily entered into an agreement with Horizon to cap the value of their stock appreciation rights (SARS) at $14.67 per share and cease any future vesting of the SARS. These agreements with option holders make it more advantageous to exercise an option rather than a SAR whenever Horizon’s stock price exceeds $14.67 per share, therefore the option becomes potentially dilutive at $14.67 per share or higher. The number of shares used in the computation of basic earnings per share is 3,016,609 and 2,990,989 for the three-month period ended March 31, 2005 and 2004. The number of shares used in the computation of diluted earnings per share is 3,140,322 and 3,115,635 for the three month period ended March 31, 2005 and 2004.
Horizon accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
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Note 2 — Investment Securities
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The amortized cost and fair value of securities available for sale at March 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities available for sale during the three months ending March 31, 2005 or 2004.
Note 3 — Loans
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Note 4 — Allowance for Loan Losses
Note 5 — Nonperforming Assets
Note 6 — Pending Merger
Horizon has entered into an Agreement of Merger and Plan of Reorganization with Alliance Financial Corporation (Alliance). Under the terms of the agreement, Horizon will acquire Alliance and its wholly owned subsidiary, Alliance Banking Company of New Buffalo, Michigan. Horizon has agreed to purchase the outstanding shares of Alliance for $42.50 per share for a total transaction value of $13.1 million. Alliance stockholders will receive 100% cash for their shares. When the merger is consummated, on a pro forma basis using December 31, 2004, numbers, the combined companies will have approximately $1.04 billion in total assets, $649 million in total loans, $725 million in total deposits and $50 million in stockholders’ equity. The acquisition is expected to result in approximately $8.3 million of goodwill and other intangibles. Management anticipates the transaction, which is subject to regulatory approval and approval by Alliance stockholders, is expected to close in the second quarter of 2005.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Conditionand Results of OperationsFor the Three Months Ended March 31, 2005
Forward–Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or “Company”) and Horizon Bank, N.A. (Bank) and Horizon’s other subsidiaries. Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Horizon, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Horizon’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on Horizon’s future activities and operating results include, but are not limited to, changes in: interest rates, general economic conditions, legislative and regulatory changes, U.S. monetary and fiscal policies, demand for products and services, deposit flows, competition and accounting policies, principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Introduction
The purpose of this discussion is to focus on Horizon’s financial condition, changes in financial condition and the results of operations in order to provide a better understanding of the consolidated financial statements included elsewhere herein. This discussion should be read in conjunction with the consolidated financial statements and the related notes.
Overview
Net income declined from the first quarter of 2004 due to the costs related to new market expansion and a decline in mortgage loan volume. To offset the anticipated decline in mortgage loan volume, Horizon continued to expand consumer and commercial lending activities. Both of these areas are up from December 31, 2004 and from the first quarter of 2004 .
Horizon’s expansion efforts include a new branch in St. Joseph, Michigan, a loan and deposit production office in South Bend, Indiana and the pending acquisition of Alliance Financial Corporation which is expected to close in the second quarter. These efforts are the primary reason for the 15.2% increase in non-interest expense from the first quarter of 2004, but will have a positive impact as the new markets mature in the future.
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 on Form 10-K contain a summary of the Company’s significant accounting policies and are presented on pages 39-43 of Form 10-K for 2004. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy.
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An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. Horizon’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans, and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance may include factors such as local, regional, and national economic conditions and forecasts, and adequacy of loan policies and internal controls, the experience of the lending staff, bank regulatory examination results, and changes in the composition of the portfolio.
Horizon considers the allowance for loan losses of $7.402 million adequate to cover losses inherent in the loan portfolio as of March 31, 2005. However, no assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses.
Financial Condition
Liquidity
The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the Federal Home Loan Bank (FHLB). During the three months ended March 31, 2005, cash and cash equivalents decreased by approximately $2.0 million. At March 31, 2005, in addition to liquidity provided from the normal operating, funding, and investing activities of Horizon, the Bank has available approximately $109 million in unused credit lines with various money center banks including the FHLB.
There have been no other material changes in the liquidity of Horizon from December 31, 2004 to March 31, 2005.
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios for “well capitalized” banks at March 31, 2005. Stockholders’ equity totaled $49.638 million as of March 31, 2005 compared to $50.432 million as of December 31, 2004. The decrease in stockholders’ equity during the three months ended March 31, 2005 is primarily the result of a decline in the market value of Horizon’s investment securities available for sale. This decline was partially offset by net income, net of dividends declared, the exercise of stock options and the amortization of unearned compensation. At March 31, 2005, the ratio of stockholders’ equity to assets was 5.44% compared to 5.52% at December 31, 2004.
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During the course of a periodic examination by the Bank’s regulators that commenced in February 2003, the examination personnel raised the issue of whether the Bank’s mortgage warehouse loans should be treated as other loans rather than home mortgages for call report purposes. If these loans are treated as other loans for regulatory reporting purposes, it would change the calculations for risk-based capital and reduce the Bank’s risk-based capital ratios. Management believes that it has properly characterized the loans in its mortgage warehouse loan portfolio for risk-based capital purposes, but there is no assurance that the regulators will concur with that determination. Should the call report classification of the loans be changed, Horizon and the Bank would still be categorized as well capitalized at March 31, 2005.
There have been no other material changes in Horizon’s capital resources from December 31, 2004 to March 31, 2005.
Material Changes in Financial Condition – March 31, 2005 compared to December 31, 2004
During the first three months of 2005, investment securities increased approximately $15.6 million and loans outstanding decreased approximately $15.0 million. The repayment of loans provided funding for the increase in investment securities. Future loan growth will be partially funded with cash flow from the investment portfolio. Mortgage warehouse loans declined approximately $38 million or 29.7% from December 31, 2004 and on average was down $19 million from the first quarter of 2004. While all other areas of loans showed growth, the growth did not offset the decline in the mortgage warehouse area. Commercial loan growth was negatively impacted by the unexpected payoff of a single large commercial loan. Consumer loan growth was attributed to an increase in indirect loan volume coming from new markets in southwest Michigan and north central Indiana.
Deposits increased approximately $22.6 million during the quarter. Noninterest bearing deposits increased primarily from corporate and public fund deposits. The growth in interest bearing deposits came primarily in public fund certificates of deposit. This deposit growth allowed Horizon to reduce short term borrowings by approximately $23 million.
There have been no other material changes in the financial condition of Horizon from December 31, 2004 to March 31, 2005.
Results of Operations
Material Changes in Results of Operations – Three months ended March 31, 2005 compared to the three months ended March 31, 2004
During the three months ended March 31, 2005, net income totaled $1.303 million or $.42 per diluted share compared to $1.517 million or $.49 per diluted share for the same period in 2004.
Net interest income was $6.773 million for the three months ended March 31, 2005, compared to $5.589 million for the same period of 2004. The increase resulted primarily from an increase in average earning assets from the same quarter of the prior year of $133.05 million or 18.6%. An increase of five basis points in the net interest margin from the same quarter of the prior year also contributed to this increase. A large portion of the current year growth in earning assets was the result of growth in commercial and consumer loans of $45.8 million and $41.8 million, respectively, which more than offset the $82.9 million decline in mortgage warehouse loans when compared to the same period in 2004. Investment securities, which carry lower yields than loans, also grew during this quarter. This kept the net interest margin down, but positively impacted net income.
Total noninterest income was $2.280 million for the three months ended March 31, 2005 compared to $2.695 million for the same period in 2004. The decrease resulted from a decline in service charge income, wire transfer fees and ATM fees. Service charge income declined apparently from a fundamental change in consumer spending habits. ATM fees decreased as several machines were
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removed from service, and wire transfer fees have declined due to lower mortgage warehouse volume. Gain on sale of loans decreased due to the decline in overall mortgage lending activity.
Other income in 2005 included approximately $160 thousand in pre-tax income from the sale of the retail property and casualty insurance lines of Horizon Insurance Services, Inc. This completes the sale of Horizon’s property and casualty insurance business as the commercial lines were sold in the fourth quarter of 2002. The impact of the sale of these lines of insurance was not material to Horizon on a consolidated basis.
Total noninterest expense was $6.978 million for the three months ended March 31, 2005 compared to $6.055 million for the same period in 2004. This increase relates primarily to additional human resource costs to support Horizon’s expansion in new and existing markets throughout northern Indiana and southwest Michigan.
There have been no other material changes in the results of operations of Horizon for the three months ending March 31, 2005 and 2004.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Horizon currently does not engage in any derivative or hedging activity. Refer to Horizon’s 2004 Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2004 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
Based on an evaluation of disclosure controls and procedures as of March 31, 2005, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a-15(e)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.
Changes In Internal Controls
Since the evaluation date, there have been no significant changes in Horizon’s internal controls or in other factors that could significantly affect such controls.
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Horizon Bancorp And Subsidiaries
Part II — Other Information
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases that the Company made of its Common Stock during the quarter ended March 31, 2005:
Issuer Purchases of Equity Securities
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
(a) Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INDEX TO EXHIBITS
The following documents are included as Exhibits to this Report.
Exhibit
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