Horizon Bancorp Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 13, 2015. This is an annual report, not a standalone fourth-quarter filing. Horizon is a commercial bank holding company operating mainly in Indiana and Michigan.
Financial performance and position
Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets, year-end | $2,076.9 | $1,758.3 |
| Net interest income | $63.0 | $61.4 |
| Net interest margin | 3.62% | 3.96% |
| Net income | $18.1 | $19.9 |
| Diluted earnings per share | $1.90 | $2.17 |
| Net cash from operating activities | $17.7 | $47.0 |
| Cash and cash equivalents, year-end | $43.5 | $31.7 |
- Revenue and margins: Interest income was $76.2 million and non-interest income was $26.3 million, for combined interest and non-interest income of $102.5 million, up from $100.8 million in 2013. Net interest income rose 2.6%, but reported net interest margin fell 34 basis points. Excluding acquisition-related purchase accounting adjustments, management reported margin of 3.47% versus 3.57% in 2013.
- Profitability: Net income fell about 8.9%; diluted EPS fell about 12.4%. Return on average assets was 0.93% (1.13% in 2013), and return on average common equity was 10.60% (12.86% in 2013). Fourth-quarter net income was $4.9 million and diluted EPS was $0.51.
- Loans and credit: Total loans were $1,378.6 million, up 29.0%; growth reflected organic lending and the Summit acquisition. The allowance for loan losses was $16.5 million, or 1.19% of loans, versus $16.0 million, or 1.49%, in 2013. Provision expense increased to $3.1 million from $1.9 million. Non-performing loans rose to $22.4 million from $18.3 million, while the ratio to loans improved to 1.62% from 1.70%. Net charge-offs were $2.5 million, versus $4.2 million.
- Deposits, liquidity and debt: Deposits were $1,482.3 million, up 14.8%; borrowings were $351.2 million, up from $256.3 million, and subordinated debentures were $32.6 million. Year-end stockholders’ equity was $194.4 million; tangible equity to tangible assets was 7.32%. Management reported approximately $301.4 million in available credit lines and considered funding adequate. Cash and cash equivalents increased $11.8 million during the year.
- Capital and dividends: The Bank was categorized as well capitalized. Its total risk-based capital ratio was 13.08% and Tier 1 leverage ratio was 8.80%. Common dividends declared increased to $0.51 per share from $0.42; the quarterly dividend reached $0.14 in the fourth quarter.
Material changes versus 2013
- Horizon completed its acquisition of SCB Bancorp/Summit Community Bank on April 3, 2014. Reported consideration was $18.9 million, excluding retirement of Summit debt; the acquisition added deposits and loans and contributed to balance-sheet growth. The company recorded about $1.3 million in related expenses and $8.4 million of goodwill from the transaction.
- Net income declined despite higher net interest income. Management cited lower acquisition-related loan accretion income ($2.7 million versus $6.3 million), higher loan-loss provision, higher operating costs and Summit-related transaction expenses, and shares issued in the acquisition.
- Non-interest expense increased 6.0% to $61.9 million, reflecting growth and acquisition costs, including approximately $1.0 million of Summit-related outside-services and consulting fees. Non-interest income rose 1.4%; mortgage loan sale gains decreased as mortgage originations for sale fell to $229.2 million from $346.4 million.
- Investment securities declined to $489.5 million, principally as securities were redeployed to support loan growth. On April 1, 2014, Horizon transferred $167.1 million fair value of securities from available-for-sale to held-to-maturity.
- Net cash from operations decreased to $17.7 million. Investing activities used $149.0 million, principally reflecting $190.8 million of net loan growth; financing activities provided $143.1 million, including increases in deposits and borrowings.
Outlook, risks and unusual items
- Management did not provide numerical earnings guidance. It said it did not expect a significant near-term rise in interest rates, while anticipating that rates would eventually increase from historically low levels. It noted that rate changes, competition and repricing could pressure net interest margin.
- Management expects benefits from the Summit acquisition, including a larger deposit base, lower transaction costs and economies of scale; realization of expected savings is uncertain. In February 2015, Horizon agreed to acquire Peoples Bancorp for estimated transaction value of $73.1 million, subject to shareholder, regulatory and other conditions, with anticipated completion in the third quarter of 2015.
- Key risks include credit deterioration—particularly in commercial, consumer/indirect auto and real estate lending—loan-loss reserve estimation, interest-rate and liquidity risk, mortgage warehouse fraud and funding needs, mortgage secondary-market dependence, competition, regulatory and capital changes, cybersecurity and technology disruptions, and acquisition integration and execution.
- Unusual or judgment-sensitive items include purchase-accounting loan accretion, acquisition expenses and goodwill, a $988,000 gain on securities sales, and fair-value estimates for goodwill, servicing rights, loans and derivatives. Management reported no securities impairment considered other-than-temporary and no material off-balance-sheet arrangements; loan commitments were $408.6 million and standby letters of credit $3.9 million.
- Legal proceedings were described as ordinary-course matters, with management not expecting a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether loan growth—especially commercial real estate and consumer lending—can be sustained without further deterioration in non-performing loans, charge-offs or required reserves.
- Whether core net interest margin stabilizes, given the decline in reported margin and lower acquisition-related accretion income.
- How much of 2014 earnings depended on acquisition accounting, securities gains and Summit-related costs; reconcile reported results with management’s non-GAAP measures.
- Whether increased borrowings and loan commitments remain manageable alongside deposit growth, funding availability and regulatory capital requirements.
- Progress, cost savings and integration risks for Summit, and the terms, approvals, financing and expected impact of the proposed Peoples Bancorp acquisition.
- Accuracy of key balance-sheet and cash-flow figures: the filing’s selected-data table reports 2014 total borrowings of $383.8 million, while the balance sheet reports borrowings of $351.2 million; the former appears to include subordinated debentures, so confirm definitions when comparing.