ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS Horizon Bancorp, a registered bank holding company organized under the laws of the State of Indiana on April 26, 1983, (Registrant), became the parent corporation and sole shareholder of The First Merchants National Bank of Michigan City pursuant to a plan of reorganization effective October 31, 1983. Prior to October 31, 1983, the Registrant conducted no business and had only nominal assets necessary to complete the plan of reorganization.
On October 1, 1986 the Registrant issued 399,340 shares of its common stock in exchange for all of the common stock of Citizens Michiana Financial Corporation in connection with mergers of such companies and their subsidiaries. Subsequent to the merger, the Registrant remains a one-bank holding company with a wholly-owned subsidiary, Horizon Bank, N.A. (Bank) and Bank's wholly-owned subsidiaries, IMS Investment Management, N.A. (IMS) and Phoenix Insurance Services, Inc. (Phoenix) and non-bank subsidiaries, HBC Insurance Group (Insurance Company) and The Loan Store, Inc., (Loan Store).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Registrant, Bank and its subsidiaries are engaged in the commercial and retail banking business, investment management services, commercial and personal property and casualty insurance services, retail lending and insurance credit life sales. Refer to Item 1(e) and Item 6 for information pertaining to Registrant's banking business.
(c) NARRATIVE DESCRIPTION OF BUSINESS The Registrant's business is that incident to its 100% ownership of Bank, Loan Store and the Insurance Company. The main source of funds for the Registrant is dividends from Bank. Bank was chartered as a national bank association in 1873 and has operated continuously since that time. Bank , whose deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law, is a full-service commercial bank offering a broad range of commercial and retail banking services, corporate and individual trust and agency services, commercial and personal property and casualty insurance services and other services incident to banking. Bank maintains four facilities located within LaPorte County, Indiana and four facilities located in Porter County, Indiana. At December 31, 1998, Bank had total assets of $408,443,000 and total deposits of $322,401,000. Aside from the stock of Bank, Insurance Company and Loan Store, the Registrant's only other significant assets are cash and cash equivalents totaling approximately $2,007,000, investment securities totaling approximately $377,000 and taxes receivable of approximately $287,000 at December 31, 1998.
The business of the Registrant, Bank, IMS, Phoenix, Insurance Company and Loan Store is not seasonal to any material degree.
No material part of the Registrant's business is dependent upon a single or small group of customers, the loss of any one or more of whom would have a materially adverse effect on the business of the Registrant. Revenues from loans accounted for 71% in 1998, 72% in 1997, and 68% in 1996 of the total consolidated revenue. Revenues from investment securities accounted for 13% in 1998, 14% in 1997 and 15% in 1996 of total consolidated revenue.
The Registrant has no employees and there are approximately 198 full and part-time persons employed by Bank, IMS and Loan Store as of December 31, 1998.
A high degree of competition exists in all major areas where the Registrant engages in business. Bank's primary market consists of LaPorte County, Indiana, Porter County, Indiana, and Berrien County, Michigan. Bank competes with commercial banks located in the home county and contiguous counties in Indiana and Michigan, as well as with savings and loan associations, consumer finance companies, and credit unions located therein. To a more moderate extent, Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services, and certain government agencies.
The Insurance Company offers credit life and accident and health insurance. The Loan Store, Inc. is engaged in the business of retail lending and operates three facilities in Northwest Indiana. The net income generated from the Insurance Company and the Loan Store are not significant to the overall operations of the Registrant.
REGULATION The earnings and growth of the banking industry and the Registrant are affected not only by the general economic conditions, but also by the credit policies of monetary authorities, particularly the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to contest recessionary trends and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve System to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve System have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and the money markets, and as a result of actions by monetary and fiscal authorities, including the Federal Reserve System, interest rates, credit availability and deposit levels may change due to circumstances beyond the control of the Registrant or Bank.
The Registrant, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (Act), and is registered with the Board of Governors of the Federal Reserve System (Board of Governors). Under the Act, the Registrant is required to obtain prior approval of the Board of Governors before acquiring direct ownership or control of more than 5% of the voting shares of any bank. With certain exceptions, the Act precludes the Registrant from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to its subsidiary. The Registrant may engage in, and may own shares of companies engaged in, certain activities found by the Board of Governors to be so closely related to banking as to be a proper incident thereto.
The Registrant is required to file annual reports of its operations with the Board of Governors and such additional information as they may require pursuant to the Act, and the Registrant and Bank are subject to examination by the Board of Governors. Further, the Registrant and Bank are prohibited from engaging in certain tie-in arrangements with respect to any extension of credit or provision of property or services.
The Board of Governors also possesses the authority through cease and desist powers to regulate parent holding company and nonbank subsidiaries where action of a parent holding company or its nonbank subsidiaries constitutes a serious threat to the safety, soundness or stability of a subsidiary bank. Federal bank regulatory agencies also have the power to regulate debt obligations issued by bank holding companies. Included in these powers is the authority to impose interest ceilings and reserve requirements on such debt obligations.
The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve and, for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Further, Indiana law permits interstate bank holding company acquisitions on a reciprocal basis, subject to certain limitations. Beginning July 1, 1992, Indiana law permits the Registrant to acquire banks, and be acquired by bank holding companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies.
The Registrant, Bank, IMS, Phoenix, Insurance Company and Loan Store are "affiliates" within the meaning of the Federal Reserve Act. The Federal Reserve Act and the Federal Deposit Insurance Act limit the amount of the Bank's loans or extensions of credit to affiliates, its investments in the stock or other securities thereof, and its taking of such stock or securities as collateral for loans to any borrower.
Bank, as a national bank, is regulated and regularly examined by the Office of the Comptroller of the Currency (OCC). In addition to certain statutory limitations on the payment of dividends, approval of the OCC is required for any dividend to the Registrant by Bank if the total of all dividends, including any proposed dividend, declared by Bank in any calendar year exceeds the total of its net profits (as defined by the OCC) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.
The Federal Reserve Board implemented risk-based capital requirements for banks and bank holding companies in December, 1988. The risk-based capital requirements have little effect on the Registrant because existing capital is in excess of the requirements. (See additional discussion in Management's Discussion and Analysis in Registrant's Annual Report to Shareholders, Exhibit 13.)
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALE None
(e) STATISTICAL DISCLOSURES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
Information required by this section of Securities Act Industry Guide 3 is presented in Management's Discussion and Analysis Section of the Corporation's 1998 Annual Report to Shareholders.
II. INVESTMENT PORTFOLIO
(A) The following is a schedule of the book value of investment securities available for sale and held to maturity at December 31, 1998, 1997 and 1996:
II. INVESTMENT PORTFOLIO (Continued)
(B) The following is a schedule of maturities of each category of debt securities and the related weighted average yield of such securities as of December 31, 1998:
(1) Amortized cost is based on contractual maturity or call date where a call option exists (2) Maturity based upon maturity date
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis.
(C) Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer which exceeded 10% of the consolidated stockholders' equity of the Registrant at December 31, 1998.
III. LOAN PORTFOLIO
(A) Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31 for the years indicated.
III. LOAN PORTFOLIO (Continued)
(B) Maturities and Sensitivities of Loans to Changes in Interest Rates - The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage and installment loans, as of December 31, 1998:
The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)
(C) Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following schedule summarizes nonaccrual, past due and restructured loans.
The decrease in nonaccrual loans in 1995 is primarily due to three loans which were returned to an accruing basis. These loans had sustained required payment performance over the last six months or longer.
III. LOAN PORTFOLIO (Continued)
(Thousands) Gross interest income that would have been $64 recorded on nonaccrual loans outstanding as of December 31, 1998 in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period.
Interest income actually recorded on 0 nonaccrual loans outstanding as of December 31, 1998 and included in net income for the period.
Interest income not recognized during the $64 period on nonaccrual loans outstanding as of December 31, 1998.
Discussion of Nonaccrual Policy
From time to time, the Bank obtains information which may lead management to believe that the collection of interest may be doubtful on a particular loan. In recognition of such, it is management's policy to convert the loan from an "earning asset" to a nonaccruing loan. Further, it is management's policy to place a commercial loan on a nonaccrual status when delinquent in excess of 90 days, unless the Loan Committee approves otherwise. All loans placed on nonaccrual status must be reviewed by the officer responsible for the loan, the senior lending officer and the loan review officer. The loan review officer monitors the loan portfolio for any potential problem loans.
2. Potential Problem Loans
Loans where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms, and not included in Section 1 above, amount to $341,000 at December 31, 1998. Loan customers included in this category are having financial difficulties at the present time and may need adjustments in their repayment terms. Payments are anticipated or collateral or guarantees are available to reduce any possible loss. These loans and potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed in Section 1 above. Management believes that these loans do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or management believes that these loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
3. Foreign outstandings
None
4. Loan Concentrations
As of December 31, 1998 there are no significant concentrations of loans exceeding 10% of total loans other than those disclosed in Item III above.
III. LOAN PORTFOLIO (Continued)
(D) Other Interest-Bearing Assets
Other than $133,000 held as other real estate owned, net of allowance, there are no other interest-bearing assets as of December 31, 1998 which would be required to be disclosed under Item III C.1 or 2 if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following is an analysis of the activity in the allowance for loan losses account:
The increase in the provision for loan losses in 1997 was the result of increased charge-offs identified in the installment loan portfolio, specifically direct consumer loans and credit cards. The volume of charge-offs in these portfolios was beginning to reduce in late 1998. Management expects charge-offs in all other portfolios to remain at the 1997 levels.
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and the percentage of loans in each category to total loans.
Allocation of the Allowance for Loan Losses at December 31. (thousands)
The increase in the reserve allocation for installment loans from 1995 to 1996 is primarily the result of the change in methodology for the historical portion of the allowance calculation. In 1996, the Bank began using the industry average charge-off rate instead of the Bank's historical charge-off rate which was used in previous years. This change in methodology resulted in a $325 increase in the portion of the allowance allocated to installment loans in 1996.
In 1998, $277 thousand of the increase in the allowance allocated to installment loans is related to loans originated at the Loan Store. The underwriting standards of the subsidiary have been evaluated and strengthened in 1998. Management expects the current allocation of the allowance to continue through 1999. The remaining increase in the allocation associated with installment loans is related to the methodology adopted in 1996 in which the higher of the Bank or the industry average charge-off rate is utilized. The industry average historical rate was higher than Banks historical charge-off rate in 1998 resulting in an additional allocation to the installment loan portfolio of $160 thousand.
V. DEPOSITS
Information required by this section is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13.
VII. SHORT-TERM BORROWINGS
The following is a schedule of statistical information relative to securities sold under agreements to repurchase which were secured by U.S. Treasury and U.S. Government agency securities and mature within one year. This product was discontinued on January 1, 1997. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period.
ITEM 2.
ITEM 2. PROPERTIES - -------------------
The main office of the Registrant and Bank is located at 515 Franklin Square, Michigan City, Indiana. The building located adjacent to the main office of the Registrant and Bank, at 502 Franklin Square, houses the credit administration, operations and micro-computer departments of Bank. In addition to these principal facilities, the Bank has eight sales offices located at:
5477 Johnson Road, Michigan City, Indiana 3631 South Franklin Street, Michigan City, Indiana 117 E First St., Wanatah, Indiana 1410 Lincolnway, LaPorte, Indiana 754 Indian Boundary Road, Chesterton, Indiana 3125 N. Calumet, Valparaiso, Indiana 6504 U.S. Highway 6, Portage, Indiana 265 U.S. Highway 30, Valparaiso, Indiana
The Loan Store has sales offices at the following locations:
8343 Indianapolis Blvd., Highland, Indiana 510 W. McKinley, Mishawaka, Indiana 5176 South Franklin, Michigan City, Indiana
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
The information required under this Item is incorporated by reference to the information appearing under the caption "Note 18 - Commitments, Off-Balance Sheet Risk and Contingencies" of the registrants Annual Report to Shareholders, Exhibit 13.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
No matters were submitted to a vote of the Registrant's stockholders during the fourth quarter of the 1998 fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------
The information required under this item is incorporated by reference to the information appearing under the caption "Market for Horizon's Common Stock and Related Stockholder Matters" of the Registrant's Annual Report to Shareholders, Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
The information required under this item is incorporated by reference to the information appearing under the caption "Summary of Selected Financial Data" of the Registrant's Annual Report to Shareholders, Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
Management's discussion and analysis of financial condition and results of operations appears in the 1998 Annual report to Shareholders, Exhibit 13 and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The consolidated financial statements and supplementary data required under this item are incorporated herein by reference to the Annual Report to Shareholders, Exhibit 13. The Registrant is not required to furnish the supplementary financial information specified by Item 302 of Regulation S-K.
Consolidated Balance Sheets, December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to the Consolidated Financial Statements Report of Independent Public Accountants
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE --------------------
The disclosures required under this item are incorporated by reference to the Registrant's Forms 8-K, Exhibit 16.
PART III --------
Information relating to the following items will be included in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held May 27, 1999 ("1999 Proxy Statement"). The 1999 Proxy Statement will be filed with the Commission within one hundred twenty days of the close of the Registrant's last fiscal year and is in part incorporated into this Form 10-K Annual Report by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
(a) 1. Financial Statements
The following consolidated financial statements of the Registrant appear in the 1998 annual report to shareholders on the pages referenced and are specifically incorporated by reference under Item 8 of this Form 10-K:
(a) 2. Financial Statement Schedules -----------------------------
Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.
(a) 3. Exhibits --------
Reference is made to the Exhibit Index which is found on page 16 of this Form 10-K.
(b) Reports on Form 8-K -------------------
The following Forms 8-K were filed during 1998:
June 16, 1998 - Change in Independent Accountants
October 20, 1998 - Termination of President and Chief Administrative Officer
(c) Reference is made to the Exhibit Index which is found on page 16 of his Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HORIZON BANCORP ------------------------------------------- (Registrant)
Date 3/17/99 /s/ Robert C. Dabagia ------------- ------------------------------------------- Robert C. Dabagia Chairman & Chief Executive Officer
Date 3/17/99 /s/ Diana E. Taylor ------------- ------------------------------------------- Diana E. Taylor Chief Financial Officer/Secretary/Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature and Title ---- -------------------
3/17/99 /s/ Dale W. Alspaugh - ------- --------------------------------- Dale W. Alspaugh, Director
3/17/99 /s/ Russell L. Arndt - ------- --------------------------------- Russell L. Arndt, Director
3/17/99 /s/ George R. Averitt - ------- --------------------------------- George R. Averitt, Director
3/17/99 /s/ Robert C. Dabagia - ------- --------------------------------- Robert C. Dabagia, Director Chairman & Chief Executive Officer
3/17/99 /s/ Craig M. Dwight - ------- --------------------------------- Craig M. Dwight, Director President
3/17/99 /s/ Myles J. Kerrigan - ------- --------------------------------- Myles J. Kerrigan, Director
3/17/99 /s/ Robert E. McBride - ------- --------------------------------- Robert E. McBride, Director
3/17/99 /s/ Larry N. Middleton - ------- --------------------------------- Larry N. Middleton, Director
3/17/99 /s/ Gene L. Rice - ------- --------------------------------- Gene L. Rice, Director
3/17/99 /s/ Susan D. Sterger - ------- --------------------------------- Susan D. Sterger, Director
3/17/99 /s/ Robert E. Swinehart - ------- --------------------------------- Robert E. Swinehart, Director
EXHIBIT INDEX -------------
The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: