Horizon Bancorp, Inc. — 2015 Form 10-K
Business context and reporting period. Horizon Bancorp is an Indiana bank holding company operating Horizon Bank, a commercial bank serving Indiana and Michigan. This filing reports the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Peoples Bancorp was acquired on July 1, 2015, so 2015 results include Peoples only from the acquisition date, affecting year-over-year comparisons.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets at year-end | $2.652 billion | $2.077 billion |
| Total deposits at year-end | $1.880 billion | $1.482 billion |
| Loans, before allowance | $1.749 billion | $1.379 billion |
| Net interest income | $74.7 million | $63.0 million |
| Net interest margin | 3.56% | 3.62% |
| Non-interest income | $30.4 million | $26.3 million |
| Non-interest expense | $74.2 million | $61.9 million |
| Net income | $20.5 million | $18.1 million |
| Diluted EPS | $1.89 | $1.90 |
| Net cash from operating activities | $35.2 million | $17.7 million |
- 2015 interest income was $88.6 million; interest expense was $13.9 million. The lower net interest margin reflected asset yields declining more than funding costs.
- Reported return on average assets was 0.87% (0.93% in 2014); return on average equity was 9.87% (10.60%). Management also presents non-GAAP adjusted results; those measures exclude specified acquisition-related and unusual items and should not be conflated with reported GAAP results.
- Provision for loan losses was $3.2 million. The allowance was $14.5 million, or 0.83% of loans, versus $16.5 million, or 1.19%, a year earlier. Net charge-offs rose to $5.1 million from $2.5 million.
- Non-performing loans fell to $16.7 million, or 0.95% of loans, from $22.4 million, or 1.62%. Other real estate owned increased to $3.2 million from $1.0 million.
- Year-end stockholders’ equity was $266.8 million; tangible equity to tangible assets was 7.60%. The Bank was categorized as well capitalized: total risk-based capital was 12.57%, Tier 1 capital 11.80%, common equity Tier 1 11.80%, and leverage 8.77%.
- Borrowings were $449.3 million and subordinated debentures $32.8 million. Cash and due from banks was $48.7 million. Management reported approximately $253.2 million of available credit from funding sources, including FHLB and Federal Reserve facilities.
- Cash flows: investing activities used $124.2 million and financing activities provided $94.1 million; cash and cash equivalents increased $5.2 million to $48.7 million.
- Fourth-quarter 2015 net income was $6.2 million and diluted EPS was $0.51, compared with $4.9 million and $0.51 in fourth-quarter 2014.
Material changes versus the prior comparable period
- Peoples acquisition increased the scale of the balance sheet: total assets grew 27.7%, deposits 26.8%, and loans 26.9%. The acquisition added approximately $351.1 million of deposits and $224.4 million of loans at acquisition-date fair value; consideration was approximately $78.1 million.
- Net interest income increased 18.7%, and non-interest income increased 15.7%, while non-interest expense rose 19.8%, including $4.9 million of merger expenses. Net income increased 13.5%, but diluted EPS edged down as the acquisition increased diluted shares.
- Loan growth included substantial growth in residential real estate loans, up 71.7%, largely reflecting Peoples. Commercial loans reached $805.0 million. Investment securities increased $143.1 million, also primarily related to the acquisition.
- Reported net interest margin declined six basis points. Excluding acquisition-related purchase-accounting accretion, management reported a 3.42% margin for 2015 versus 3.47% for 2014.
Outlook, risks, contingencies, and unusual items
- Management said it did not expect a significant near-term rise in interest rates, while anticipating rates could increase later. No specific earnings or revenue guidance was provided.
- Key risks include credit deterioration, real estate values and local economic conditions, interest-rate and deposit repricing risk, liquidity and funding access, acquisition integration and realization of expected savings, competition and technology-driven disintermediation, mortgage-market dependence, cyber and operational risk, and regulatory changes.
- Mortgage warehousing totaled $144.7 million at year-end; the filing identifies fraud and transaction risk in this business. The bank processed approximately $2.7 billion of mortgage warehouse loans during 2015.
- Acquisition-related items included $4.9 million of Peoples merger expenses and $3.0 million of purchase-accounting interest income. The company also recognized a $145,000 bank-owned life insurance death benefit and $189,000 gain on securities sales. These items affect comparisons and adjusted measures.
- On February 1, 2016, Horizon redeemed its $12.5 million Series B preferred stock using cash on hand. On February 4, it announced an agreement to acquire Kosciusko Financial for an implied value of approximately $22.5 million, subject to shareholder, regulatory, and other conditions; closing was anticipated in the second quarter of 2016.
- Loan commitments were approximately $468.8 million and letters of credit $3.6 million. Management did not anticipate losses from these commitments. Management stated ordinary-course litigation was not expected to materially affect the company.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Peoples, acquired during 2015, was excluded from the internal-control audit scope.
Important facts for investors to verify
- How much of loan, deposit, and earnings growth reflects Peoples versus organic growth, and whether expected integration savings are being achieved.
- Whether net interest margin stabilizes or continues to contract as assets and deposits reprice, and how rate changes affect deposit retention and mortgage activity.
- Whether credit costs remain controlled as the portfolio expands: monitor charge-offs, allowance coverage, non-performing loans, troubled debt restructurings, and the rise in OREO.
- Liquidity and refinancing exposure, including the $298.2 million of borrowings contractually due within one year and the scale and utilization of loan commitments.
- The economics, funding, regulatory approvals, and integration risks of the announced Kosciusko acquisition, and the effect of preferred-stock redemption on capital and dividends.
- Reconcile management’s non-GAAP earnings presentations to GAAP results: the filing provides multiple adjusted figures based on different exclusions, so confirm the specific adjustment basis used in any comparison.