Horizon Bancorp 10-Q/A
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
450 5th Street N.W.
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
     
Indiana   35-1562417
     
(State or other jurisdiction of incorporation or organization)   (I.R. S. Employer Identification No.)
     
515 Franklin Square, Michigan City, Indiana   46360
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (219) 879-0211
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o          Accelerated filer o          Non-accelerated filer þ
     Indicate by check mark whether the registrant is a shell company (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:
3,238,682 at November 8 , 2006
 
 

 


TABLE OF CONTENTS

PART 1 — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
INDEX TO EXHIBITS
EX-11
EX-31.1
EX-31.2
EX-32


Table of Contents

EXPANATORY NOTE
This Form 10-Q/A (Amendment No. 1) is being filed solely for the purpose of correcting the date in the certification of our chief executive officer and chief financial officer required by section 906 of the Sarbanes-Oxley Act of 2002 (Exhibit 32) filed on November 13, 2006. The date was stated as June 30, 2006 but should have been September 30, 2006.
This Form 10-Q/A corrects the error stated above and does not modify any information previously filed in the Quarterly Report or update any disclosure appearing therein or events occurring after the date of filing that Quarterly Report.

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Table of Contents

PART 1 — FINANCIAL INFORMATION
     ITEM 1. FINANCIAL STATEMENTS
Horizon Bancorp and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
                 
    September 30,    
    2006   December 31,
    (Unaudited)   2005
     
Assets
               
Cash and due from banks
  $ 21,673     $ 39,163  
Interest-bearing demand deposits
    104       87  
     
Cash and cash equivalents
    21,777       39,250  
Interest-bearing deposits
    128       15,735  
Investment securities, available for sale
    239,869       275,177  
Loans held for sale
    6,169       2,440  
Loans, net of allowance for loan losses of $8,810 and $8,368
    820,381       724,366  
Premises and equipment
    22,891       21,425  
Federal Reserve and Federal Home Loan Bank stock
    12,457       12,983  
Goodwill
    5,787       5,787  
Other intangible assets
    2,503       2,780  
Interest receivable
    5,655       5,813  
Other assets
    21,572       22,119  
     
 
               
Total assets
  $ 1,159,189     $ 1,127,875  
     
 
               
Liabilities
               
Deposits
               
Noninterest bearing
  $ 90,205     $ 148,127  
Interest bearing
    724,981       707,439  
     
Total deposits
    815,186       855,566  
Short-term borrowings
    120,579       50,024  
Long-term borrowings
    128,969       133,609  
Subordinated debentures
    27,837       27,837  
Interest payable
    1,904       1,663  
Other liabilities
    5,224       5,646  
     
Total liabilities
    1,099,699       1,074,345  
     
 
               
Stockholders’ Equity
               
Preferred stock, no par value Authorized, 1,000,000 shares No shares issued
               
Common stock, $.2222 stated value Authorized, 22,500,000 shares Issued, 4,995,906 and 4,852,751 shares
    1,110       1,092  
Additional paid-in capital
    25,135       24,552  
Retained earnings
    52,417       48,523  
Restricted stock, unearned compensation
          (760 )
Accumulated other comprehensive loss
    (2,020 )     (2,853 )
Less treasury stock, at cost, 1,759,424 and 1,755,158 shares
    (17,152 )     (17,024 )
     
Total stockholders’ equity
    59,490       53,530  
     
 
               
Total liabilities and stockholders’ equity
  $ 1,159,189     $ 1,127,875  
     
See notes to condensed consolidated financial statements

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Horizon Bancorp and Subsidiaries
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
                                 
    Three Months Ended September 30   Nine Months Ended September 30
    2006   2005   2006   2005
    (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
     
Interest Income
                               
Loans receivable
  $ 15,010     $ 12,662     $ 41,612     $ 31,716  
Investment securities
                               
Taxable
    1,870       2,469       6,096       7,295  
Tax exempt
    878       610       2,363       1,760  
     
Total interest income
    17,758       15,741       50,071       40,771  
     
 
                               
Interest Expense
                               
Deposits
    7,003       4,375       18,273       11,348  
Federal funds purchased and short-term borrowings
    594       578       1,584       1,405  
Long-term borrowings
    1,766       1,465       5,113       4,362  
Subordinated debentures
    583       415       1,643       1,076  
     
Total interest expense
    9,946       7,193       26,613       18,191  
     
 
                               
Net Interest Income
    7,812       8,548       23,458       22,580  
Provision for loan losses
    120       360       725       1,071  
     
 
                               
Net Interest Income after Provision for Loan Losses
    7,692       8,188       22,733       21,509  
     
 
                               
Other Income
                               
Service charges on deposit accounts
    833       766       2,297       1,887  
Wire transfer fees
    101       120       290       326  
Fiduciary activities
    758       645       2,231       1,964  
Commission income from insurance agency
    -0-       -0-       -0-       46  
Gain on sale of loans
    459       474       1,087       1,341  
Gain on sale of mortgage servicing rights
    656       -0-       656       -0-  
Increase in cash surrender value of Bank owned life insurance
    122       125       348       361  
Loss on sale of securities
    (515 )     -0-       (764 )     -0-  
Other income
    448       373       1127       1,329  
     
Total other income
    2,862       2,503       7,272       7,254  
     
 
                               
Other Expenses
                               
Salaries and employee benefits
    4,228       4,221       12,524       12,471  
Net occupancy expenses
    577       605       1,756       1,612  
Data processing and equipment expenses
    725       704       2,024       1,736  
Other expenses
    2,322       2,258       6,487       5,920  
     
Total other expenses
    7,852       7,788       22,791       21,739  
     
 
                               
Income Before Income Tax
    2,702       2,903       7,214       7,024  
Income tax expense
    734       875       1,963       2,013  
     
 
                               
Net Income
  $ 1,968     $ 2,028     $ 5,251     $ 5,011  
     
 
                               
Basic Earnings Per Share
  $ .62     $ .66     $ 1.66     $ 1.64  
 
                               
Diluted Earnings Per Share
  $ .61     $ .64     $ 1.64     $ 1.59  

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Horizon Bancorp and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)
                                                                 
                                    Restricted     Accumulated              
            Additional                     Stock,     Other              
    Common     Paid-in     Comprehensive     Retained     Unearned     Comprehensive     Treasury        
    Stock     Capital     Income     Earnings     Compensation     Loss     Stock     Total  
     
Balances, December 31, 2005
  $ 1,092     $ 24,552             $ 48,523     $ (760 )   $ (2,853 )   $ (17,024 )   $ 53,530  
Net income
                  $ 5,251       5,251                               5,251  
Other comprehensive income, net of tax, unrealized gains on securities
                    833                       833               833  
 
                                                             
 
                                                               
Comprehensive income
                  $ 6,084                                          
 
                                                             
Reclassification of restricted stock, unearned compensation to paid-in capital upon adoption of SFAS 123 (R)
            (760 )                     760                          
Amortization of unearned compensation
            159                                               159  
Exercise of stock options
    18       695                                               713  
Tax benefit related to stock options
            460                                               460  
Stock option expense
            29                                               29  
Purchase treasury stock
                                                    (128 )     (128 )
Cash dividends ($.42 per share)
                            (1,357 )                             (1,357 )
                 
 
                                                               
Balances, September 30, 2006
  $ 1,110     $ 25,135             $ 52,417     $ 0     $ (2,020 )   $ (17,152 )   $ 59,490  
                 
See notes to condensed consolidated financial statements.

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Horizon Bancorp and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
                 
    Nine Months Ended September 30
    2006   2005
    (Unaudited)   (Unaudited)
     
Operating Activities
               
Net income
  $ 5,251     $ 5,011  
Items not requiring (providing) cash
               
Provision for loan losses
    725       1,071  
Depreciation and amortization
    1,841       1,633  
Share based compensation
    29        
Federal Home Loan Bank stock dividend
          (251 )
Mortgage servicing rights (recovery) impairment
    (40 )     (141 )
Deferred income tax
    967       293  
Investment securities amortization, net
    193       205  
Loss on sale of securities
    764        
Gain on sale of mortgage servicing rights
    (656 )      
Gain on sale of loans
    (1,087 )     (1,341 )
Proceeds from sales of loans
    80,225       73,032  
Loans originated for sale
    (82,867 )     (73,323 )
(Gain) loss on sale of other real estate owned
    4       (45 )
Loss on sale of fixed assets
    11       7  
Increase in cash surrender value of life insurance
    (348 )     (361 )
Net change in:
               
Interest receivable
    158       (461 )
Interest payable
    241       563  
Other assets
    (1,142 )     (481 )
Other liabilities
    (489 )     (1,134 )
     
Net cash provided by operating activities
    3,780       4,273  
     
 
               
Investing Activities
               
Net change in deposits
    15,607       4,702  
Purchases of securities available for sale
    (77,796 )     (35,111 )
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale
    113,431       54,144  
Net change in loans
    (97,144 )     (63,386 )
Purchase Federal Reserve Bank stock
    (31 )      
Proceeds from sale of mortgage servicing rights
    1,273        
Proceeds from sale of Federal Home Loan Bank stock
    557        
Proceeds from sale of fixed assets
    1       116  
Recoveries on loans previously charged-off
    471       342  
Proceeds from sale of other real estate owned
    25       484  
Purchases of premises and equipment
    (2,899 )     (865 )
Acquisition, net of cash
          (2,901 )
     
Net cash used in investing activities
    (46,505 )     (42,475 )
     
 
               
Financing Activities
               
Net change in
               
Deposits
    (40,380 )     55,731  
Short-term borrowings
    70,555       (12,058 )
Proceeds from long-term borrowings
          72,000  
Repayment of long-term borrowings
    (4,640 )     (76,079 )
Proceeds from issuance of stock
    742       1,564  
Purchase of treasury stock
    (128 )     (651 )
Tax benefit of options exercised
    460       451  
Dividends paid
    (1,357 )     (1,221 )
     
Net cash provided by financing activities
    25,252       39,737  
     
 
               
Net Change in Cash and Cash Equivalents
    (17,473 )     1,535  
 
               
Cash and Cash Equivalents, Beginning of Period
    39,250       18,254  
     
 
               
Cash and Cash Equivalents, End of Period
  $ 21,777     $ 19,789  
     
 
               
Additional Cash Flows Information
               
Interest paid
  $ 26,372     $ 17,486  
Income tax paid
    990       1,050  
See notes to condensed consolidated financial statements.

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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 — Accounting Policies
The accompanying consolidated financial statements include the accounts of Horizon Bancorp (Horizon) and its wholly-owned subsidiary, Horizon Bank, N.A. (Bank). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2006 and September 30, 2005, are not necessarily indicative of the operating results for the full year of 2006 or 2005. 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 2005 filed with the Securities and Exchange Commission. The consolidated balance sheet of Horizon as of December 31, 2005, 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 3,189,004 and 3,074,705 for the three-month period ended September 30, 2006 and 2005. The number of shares used in the computation of diluted earnings per share is 3,211,777 and 3,165,847 for the three-month period ended September 30, 2006 and 2005. The number shares used in the computation of basic earnings per share is 3,171,869 and 3,052,821 for the nine-month period ended September 30, 2006 and 2005. The number of shares used in the computation of diluted earnings per share is 3,209,940 and 3,154,808 for the nine-month period ended September 30, 2006 and 2005.
Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2005, Annual Report to Shareholders.
Effective January 1, 2006, Horizon adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has elected the modified prospective application and, as a result, has recorded approximately $29 thousand in compensation expense relating to vesting of stock options less estimated forfeitures for the nine month period ended September 30, 2006. Certain disclosures required by SFAS 123(R) have been omitted due to their immaterial nature. Prior to adoption of SFAS 123(R), unearned compensation related to restricted stock awards was classified as a separate component of stockholders’ equity. Upon the adoption of SFAS 123(R) on January 1, 2006, the balance in unearned compensation was reclassified to additional paid-in capital.

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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Prior to the adoption of SFAS 123(R), Horizon accounted 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 was reflected in net income, as all options granted under the plan 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 Horizon had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
                 
    Three Months Ended   Nine Months Ended
    September 30, 2005   September 30, 2005
     
Net income, as reported
  $ 2,028     $ 5,011  
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes
    (7 )     (27 )
     
 
               
Pro forma net income
  $ 2,021     $ 4,984  
     
 
               
Earnings per share:
               
 
               
Basic — as reported
    .66       1.64  
 
               
Basic — pro forma
    .66       1.63  
 
               
Diluted — as reported
    .64       1.59  
 
               
Diluted — pro forma
    .64       1.58  
Note 2 — Investment Securities
                                 
    2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
September 30   Cost   Gains   Losses   Value
 
Available for sale
                               
U. S. Treasury and federal agencies
  $ 51,684     $     $ (330 )   $ 51,354  
State and municipal
    80,961       1,107       (332 )     81,736  
Federal agency collateralized mortgage obligations
    11,544       7       (278 )     11,273  
Federal agency mortgage backed pools
    98,157       39       (3,348 )     94,848  
Corporate Notes
    632       26             658  
     
 
                               
Total investment securities
  $ 242,978     $ 1,179     $ (4,288 )   $ 239,869  
     

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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
                                 
    2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
December 31   Cost   Gains   Losses   Value
 
Available for sale U. S. Treasury and federal agencies
  $ 72,153     $     $ (1,786 )   $ 70,367  
State and Municipal
    64,608       1,794       (430 )     65,972  
Federal agency collateralized mortgage obligations
    22,781             (628 )     22,153  
Federal agency mortgage backed pools
    119,392       125       (3,497 )     116,020  
Corporate notes
    632       33             665  
     
 
                               
Total investment securities
  $ 279,566     $ 1,952     $ (6,341 )   $ 275,177  
     
The amortized cost and fair value of securities available for sale at September 30, 2006, 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.
                 
    Available for Sale
    Amortized   Fair
    Cost   Value
     
Within one year
  $ 5,544     $ 5,473  
One to five years
    13,133       13,038  
Five to ten years
    32,286       32,221  
After ten years
    82,314       83,016  
     
 
    133,277       133,748  
Federal agency collateralized mortgage obligations
    11,544       11,273  
Federal agency mortgage backed pools
    98,157       94,848  
     
 
               
 
  $ 242,978     $ 239,869  
     
Proceeds from sales of securities available for sale during the nine months ended September 30, 2006, were $91,265,000. Gross gains of $1,247,000 and gross losses of $2,011,000 were recognized on these sales.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2006 and December 31, 2005, was $186,039,000 and $226,292,000, respectively, which is approximately 78% and 82% of Horizon’s available-for-sale investment portfolio. These declines primarily resulted from recent increases in market interest rates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
     The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2006 and December 31, 2005.
                                                 
    Less than 12 Months   12 Months or More   Total
Description of           Unrealized           Unrealized           Unrealized
Securities   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
 
September 30, 2006
                                               
U. S. Treasury and federal agencies
  $ 12,252     $ 77     $ 15,428     $ 253     $ 27,680     $ 330  
State and municipal
    4,951       25       12,693       307       17,644       332  
Federal agency collateralized mortgage obligations
    0       0       9,479       278       9,479       278  
Federal agency mortgage backed pools
    43,797       38       87,439       3,310       131,236       3,348  
     
 
                                               
Total temporarily impaired securities
  $ 61,000     $ 140     $ 125,039     $ 4,148     $ 186,039     $ 4,288  
     
                                                 
    Less than 12 Months   12 Months or More   Total
Description of           Unrealized           Unrealized           Unrealized
Securities   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
 
December 31, 2005
                                               
U. S. Treasury and Federal agencies
  $ 11,957     $ 243     $ 57,010     $ 1,542     $ 68,967     $ 1,785  
State and municipal
    25,335       388       1,968       42       27,303       430  
Federal agency collateralized mortgage obligations
    10,313       317       11,840       312       22,153       629  
Federal agency mortgage-backed pools
    40,983       950       66,886       2,547       107,869       3,497  
     
 
                                               
Total temporarily impaired securities
  $ 88,588     $ 1,898     $ 137,704     $ 4,443     $ 226,292     $ 6,341  
     

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Horizon Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 3 — Loans
                 
    September 30,   December 31,
    2006   2005
     
Commercial loans
  $ 261,134     $ 273,310  
Mortgage warehouse loans
    113,596       97,729  
Real estate loans
    220,387       159,312  
Installment loans
    234,074       202,383  
     
 
    829,191       732,734  
Allowance for loan losses
    (8,810 )     (8,368 )
     
 
               
Total loans
  $ 820,381     $ 724,366  
     
Note 4 — Allowance for Loan Losses
                 
    September 30,   September 30,
    2006   2005
     
Allowance for loan losses Balances, beginning of period
  $ 8,368     $ 7,193  
Allowance acquired in acquisition
          557  
Provision for losses
    725       1,071  
Recoveries on loans
    471       342  
Loans charged off
    (754 )     (773 )
     
 
               
Balances, end of period
  $ 8,810     $ 8,390  
     
Note 5 — Nonperforming Assets
                 
    September 30,   December 31,
    2006   2005
     
Nonperforming loans
  $ 1,428     $ 1,822  
Other real estate owned
    25       23  
     
 
               
Total nonperforming assets
  $ 1,453     $ 1,845  
     

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Horizon Bancorp and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
For the Three and Nine Month Periods Ended September 30, 2006
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”). 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:
    credit risk: the risk that loan customers or other parties will be unable to perform their contractual obligations;
 
    market risk: the risk that changes in market rates and prices will adversely affect our financial condition or results of operation;
 
    liquidity risk: the risk that Horizon or the Bank will have insufficient cash or access to cash to meet its operating needs; and
 
    operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.
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 increased from the second quarter of 2006, and also improved from the first nine months of 2005. The major factors causing the improved performance from the first two quarters of 2006 was an increase in mortgage banking activity. The major factor causing improved performance from the prior year was the income generated from the additional assets and deposits obtained in the acquisition of Alliance Bank. This acquisition closed on June 10, 2005. The additional assets caused an increase in net interest income despite a decline in net interest margin. Non-interest expense, particularly salaries and employee benefits, were held in check. Non-interest income was impacted by losses taken on the sale of securities to restructure the investment portfolio. This was partially offset by a gain on the sale of mortgage servicing rights.

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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 44-48 of Form 10-K for 2005. 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.
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 $8.810 million adequate to cover losses inherent in the loan portfolio as of September 30, 2006. 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 nine months ended September 30, 2006, cash and cash equivalents decreased by approximately $17.5 million. At September 30, 2006, in addition to liquidity provided from the normal operating, funding, and investing activities of Horizon, the Bank has available approximately $161 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, 2005 to September 30, 2006.

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Capital Resources
As a condition of approval for the Alliance acquisition, the OCC required Horizon Bank to maintain regulatory capital ratios at 100 basis points above the “well capitalized” minimums. The capital resources of Horizon and the Bank exceed the OCC required levels at September 30, 2006. Stockholders’ equity totaled $59.490 million as of September 30, 2006 compared to $53.530 million as of December 31, 2005. The increase in stockholders’ equity during the nine months ended September 30, 2006 is primarily the result of net income, net of dividends declared and the amortization of unearned compensation. At September 30, 2006, the ratio of stockholders’ equity to assets was 5.13% compared to 4.75% at December 31, 2005.
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 September 30, 2006.
There have been no other material changes in Horizon’s capital resources from December 31, 2005 to September 30, 2006.
Material Changes in Financial Condition – September 30, 2006 compared to December 31, 2005
During the first nine months of 2006, investment securities decreased approximately $35.3 million and loans outstanding increased approximately $96.5 million. During the first nine months of 2006, Horizon sold approximately $91.5 million of lower yielding investment securities, recognizing a loss on the sale of $764 thousand. The proceeds from the sale have been used to reduce short-term debt, fund anticipated loan growth and reinvest in higher yielding securities. These transactions are anticipated to have a negative impact on net income in 2006 but will positively effect future accounting periods. With the exception of commercial loans, loans have shown strong growth since December 31, 2005. Growth came in real estate loans, where the Bank’s loan customers continued to favor adjustable rate mortgages, which are held in the Bank’s portfolio. While this caused growth in the loan portfolio, it had a negative impact on gain on sale of loans, as fewer loans are available for sale. Mortgage warehouse loans increased as mortgage loan activity increased in general due to the seasonality of mortgage lending. Installment loans grew due to increased indirect volume and the purchase of approximately $10 million of automobile loans from a third party. This growth was offset by a decline in commercial loans caused by unanticipated payoffs.
Premises and equipment increased approximately $1.5 million during the first nine months of 2006 due primarily to the construction of the Elkhart branch, which opened in June of 2006.
Deposits declined, as a large deposit made by a local municipality at year-end 2005 was withdrawn in their normal course of business in early January 2006. Total average deposits for the third quarter of 2006 increased $44 million from the fourth quarter of 2005. Short-term borrowings increased and investments decreased to fund the growth in loans.
There have been no other material changes in the financial condition of Horizon from December 31, 2005 to September 30, 2006.

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Results of Operations
Material Changes in Results of Operations – Three months ended September 30, 2006 compared to the three months ended September 30, 2005
During the three months ended September 30, 2006, net income totaled $1.968 million or $.61 per diluted share compared to $2.028 million or $.64 per diluted share for the same period in 2005.
Net interest income for the quarter ended September 30, 2006, was $7.812 million, a decrease of $736 thousand or 8.6% from the same period of the prior year. This decrease resulted from a decrease in net interest margin from 3.36% in the third quarter of 2005 to 2.96% for the current quarter. Competitive interest rate pressures on consumer deposits, particularly money market and time deposit accounts, without corresponding commercial loan growth contributed to the margin decline. Average earning assets when compared to the same quarter of the prior year showed an increase of $50 million or 5.0%. This growth in average earning assets, which came in mortgage loans mentioned above and from indirect auto loans, partially offset the decline in net interest income caused by the decline in net interest margin.
Non-interest income increased $359 thousand or 14.3% from the third quarter of 2005. The main contributing factors to the third quarter increase was: (a) a gain on the sale of mortgage servicing rights of $656 thousand. During the quarter, Horizon sold substantially all of its mortgage servicing rights with a book value of $803 thousand. The sale will allow Horizon to better focus on its core lending activities. (b) a loss on the sale of investment securities of $515 thousand. A total of $21.6 million of securities were sold, including $1.6 million of tax-exempt municipals. These securities had an average yield of approximately 3.35%. The proceeds from the sale were reinvested in securities with a yield of approximately 5.75%. This sale will have a negative after tax impact on 2006 of approximately $258 thousand but will positively impact 2007 by approximately $301 thousand. (c) Income from fiduciary activities increased $113 thousand due to the additional ESOP trustee business and an increase in assets under management.
Non-interest expense increased $64 thousand or less than one per cent from the third quarter of 2005. Expenses related to the newly established mortgage wholesale operation totaled $274 thousand, which accounted for more than 100% of the increase. On January 1, 2006, Horizon adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). For the quarter ended September 30, 2006, Horizon recorded $14 thousand of employee compensation expense related to expensing of stock options. See Note 1 to the financial statements for additional discussion of the adoption of SFAS 123(R).
There have been no other material changes in the results of operations of Horizon for the three months ending September 30, 2006 and 2005.
Material Changes in Results of Operations – Nine months ended September 30, 2006 compared to the Nine months ended September 30, 2005
During the Nine months ended September 30, 2006, net income totaled $5.251 million or $1.64 per diluted share compared to $5.011 million or $1.59 per diluted share for the same period in 2005.
Net interest income for the nine month period ended September 30, 2006, was $23.458 million, an increase of $878 thousand an increase of 3.9% over the same period of the prior year. This increase resulted from an increase in average earning assets from the same quarter of the prior year of $107.0 million or 11.9%. The growth in earning assets was the result of the Alliance Bank acquisition that contributed approximately $116 million in earning assets. The net interest margin declined from 3.28% for the 2005 period to 3.08% for 2006. Contributing to net interest income in the first nine months of 2006 was approximately $399 thousand of income, which related to commercial loans that were

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acquired at a discount in the Alliance acquisition and were paid in full during the quarter. Without this income, the net interest margin would have been approximately 3.03%.
Non-interest income for the first nine months of 2006 increased by $18 thousand. Service charges on deposit accounts increased due to the inclusion of the former Alliance checking account customers in the Horizon Bank overdraft protection product. Fiduciary fees increased as discussed above. Offsetting these increases was a decline in gain on sale of loans and brokered loan fees. While mortgage loan volume, which is the source loans to be sold, increased in the third quarter, it is still down from 2005 levels. 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.
Non-interest expense increased $1.052 million or 4.8% from the first nine months of 2005. This increase relates primarily to additional on-going expenses related to the Alliance Bank acquisition, which closed in June of 2005, including core deposit intangible amortization of approximately $277 thousand.
There have been no other material changes in the results of operations of Horizon for the nine months ending September 30, 2006 and 2005.

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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 2005 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 2005 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 September 30, 2006, 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) of the Securities Exchange Act of 1934 (the “Exchange Act”)). 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 recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes In Internal Controls
Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended September 30, 2006, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

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Horizon Bancorp And Subsidiaries
Part II — Other Information
For the Nine Months Ended September 30, 2006
ITEM 1. LEGAL PROCEEDINGS
     Not Applicable
ITEM 1A. RISK FACTORS
     No material changes from the factors included in the December 31, 2005 Form 10-K
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Not Applicable
ITEM 5. OTHER INFORMATION
     Not Applicable

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ITEM 6. EXHIBITS
     (a) Exhibits
         
 
  Exhibit 10.1   Employment Agreement, dated July 19, 2006, among Horizon Trust & Investment Management, N.A., Horizon Bank, N.A., Horizon Bancorp and Lawrence J. Mazur
 
       
 
  Exhibit 10.2   Amendment to Horizon Bancorp Restricted Stock Award Agreement, dated July, 19, 2006.
 
       
 
  Exhibit 11   Statement Regarding Computation of Per Share Earnings
 
       
 
  Exhibit 31.1   Certification of Craig M. Dwight
 
       
 
  Exhibit 31.2   Certification of James H. Foglesong
 
       
 
  Exhibit 32   Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.
HORIZON BANCORP
                 
December 11, 2006
      BY:   /s/ Craig M. Dwight    
             
Date:
      BY:   Craig M. Dwight    
 
          President and Chief Executive Officer    
 
               
December 11, 2006
      BY:   /s/ James H. Foglesong    
             
Date:
      BY:   James H. Foglesong    
 
          Chief Financial Officer    

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INDEX TO EXHIBITS
The following documents are included as Exhibits to this Report.
         
Exhibit   Description   Location
 
       
10.1
  Employment Agreement, dated July 19, 2006, among Horizon Trust & Investment Management, N.A., Horizon Bank, N.A., Horizon Bancorp and Lawrence J. Mazur.   Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed July 21, 2006
 
       
10.2
  Amendment to Horizon Bancorp Restricted Stock Award Agreement, dated July, 19, 2006.   Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed July 21, 2006
 
       
11
  Statement Regarding Computation of Per Share Earnings   Attached
 
       
31.1
  Certification of Craig M. Dwight   Attached
 
       
31.2
  Certification of James H. Foglesong   Attached
 
       
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Attached

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