Horizon Bancorp, Inc. — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; fourth-quarter figures are included where disclosed. Horizon is an Indiana bank holding company operating through Horizon Bank, with 29 full-service offices serving Northwestern and Central Indiana and Southwestern Michigan. Its single reportable segment is commercial banking.
Financial performance and position
| Metric | FY2013 / Dec. 31, 2013 | Comparison |
|---|---|---|
| Total interest and non-interest income | $100.8 million | $99.9 million in 2012 |
| Net interest income | $61.4 million | Up 5.5% from $58.2 million |
| Net income | $19.9 million | Up from $19.5 million; record annual earnings |
| Diluted earnings per share | $2.17 | Down 5.7% from $2.30 |
| Net interest margin | 3.96% | Up from 3.89%; excluding acquired-loan discount accretion, 3.57% versus 3.79% |
| Return on average assets / common equity | 1.13% / 12.86% | 1.19% / 14.72% in 2012 |
| Total assets | $1.758 billion | Down 4.9% from $1.848 billion |
| Total loans, before allowance | $1.069 billion | Down 10.2% from $1.191 billion |
| Total deposits | $1.292 billion | Down $2.6 million; core deposits increased 3.3% |
| Stockholders’ equity | $164.5 million; 9.36% of assets | $159.0 million; 8.60% of assets |
- Profitability and costs: Interest income was $74.9 million and interest expense $13.5 million. Non-interest income declined 5.2% to $25.9 million, mainly because mortgage-loan sale gains fell to $8.8 million from $14.1 million. Non-interest expense rose 8.2% to $58.4 million, including higher salaries, occupancy, processing and loan costs. The effective tax rate fell to 26.2% from 30.2%.
- Credit quality: Provision for loan losses declined to $1.9 million from $3.5 million; net charge-offs were $4.2 million versus $4.1 million. Non-performing loans fell to $18.3 million, or 1.70% of loans, from $23.8 million, or 1.97%. The allowance was $16.0 million, 1.49% of loans, compared with $18.3 million, 1.52%. Substandard loans decreased to $34.7 million from $50.2 million.
- Cash flow and liquidity: Operating cash flow was $47.0 million; cash and cash equivalents increased $1.0 million to $31.7 million. Management reported approximately $311.8 million of available credit facilities and considered funding adequate for short- and long-term needs. Deposits remain the primary funding source.
- Debt and capital: Balance-sheet borrowings were $256.3 million, down from $345.8 million; subordinated debentures were $32.5 million. The Bank was categorized as well capitalized, with total risk-based capital of 14.67%, Tier 1 risk-based capital of 13.42%, and Tier 1 leverage of 9.18%. Common dividends declared were $0.42 per share, versus $0.38 in 2012.
Material changes, outlook and risks
- The sharp decline in mortgage warehouse balances—down $153.3 million, or 61%—was attributed to higher long-term rates and lower refinancing volume. Commercial loans grew $44.7 million, while total loans contracted.
- Net interest margin benefited from approximately $6.3 million of interest income recognized from Heartland acquired-loan discounts, versus $1.5 million in 2012. Management’s stated margin excluding this accretion decreased year over year, making the reported margin improvement less indicative of underlying performance.
- Fourth-quarter 2013 net income was $4.1 million and diluted EPS was $0.45. The quarter included a $997,000 reversal of provision for loan losses; investors should distinguish this from recurring earnings.
- Other comprehensive loss was $10.8 million, largely reflecting a $12.6 million after-tax loss on available-for-sale securities. Management considered security losses temporary and reported no other-than-temporary impairment.
- On November 12, 2013, Horizon agreed to acquire SCB Bancorp/Summit Community Bank for an estimated $18.4 million, comprising 0.4904 Horizon shares and $5.15 cash per SCB share. Closing was anticipated in early Q2 2014, subject to shareholder, regulatory and other approvals; the transaction was not completed as of year-end.
- Management did not expect a significant near-term rise in interest rates, but anticipated rates would eventually increase. Key risks include interest-rate and margin changes, commercial and consumer credit exposure (including indirect auto lending), real estate values, mortgage warehouse fraud and funding needs, competition, regulatory changes, and acquisition execution. Basel III capital rules were scheduled to begin applying to Horizon in 2015, with the capital conservation buffer phased in thereafter.
- Off-balance-sheet commitments included $519.7 million of loan commitments and $1.3 million of standby letters of credit; the filing notes many commitments may expire unused. Management stated no material off-balance-sheet arrangements and did not expect ordinary-course legal proceedings to materially affect the company.
Important facts for investors to verify
- How much of earnings and the reported 3.96% margin depended on Heartland acquired-loan discount accretion, and how that accretion is expected to run off.
- Whether loan contraction persists as mortgage warehouse activity changes, and whether commercial-loan growth offsets that decline without weakening underwriting.
- Whether the lower allowance and provision remain adequate if charge-offs, consumer defaults or real-estate credit conditions worsen.
- The SCB acquisition’s final approval, closing, funding, integration costs and realized benefits.
- Liquidity and funding availability under stress, including reliance on borrowing lines, collateral requirements and the substantial volume of unfunded loan commitments.
- The effect of rising rates on net interest income, deposit costs, securities values and mortgage-related activity; also monitor the impact of securities-related accumulated other comprehensive losses.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.