Horizon Bancorp Inc. — 2012 Form 10-K Summary
Business context and reporting period
Horizon Bancorp is an Indiana bank holding company operating through Horizon Bank, with commercial and retail banking, trust and agency services across Indiana and southwestern Michigan. This is the fiscal year ended December 31, 2012, not a standalone fourth-quarter filing. The company completed its acquisition of Heartland Bancshares on July 17, 2012; results include Heartland from that date.
Key financial metrics
- Profit: Net income was $19.5 million, up from $12.8 million in 2011; diluted EPS was $2.30 versus $1.51. Return on average assets was 1.19% and return on average common equity was 14.72%.
- Revenue and margin: Interest income was $72.5 million and noninterest income was $27.3 million. Net interest income rose 21.0% to $58.2 million; net interest margin increased to 3.89% from 3.74%. The margin would have been 3.81% excluding approximately $1.5 million of acquired-loan discount accretion.
- Noninterest items: Mortgage loan sale gains increased to $14.1 million from $6.4 million, contributing to higher noninterest income. Noninterest expense rose 17.1% to $54.0 million, including about $1.5 million of Heartland transaction costs.
- Credit costs: Provision for loan losses declined to $3.5 million from $5.3 million; net charge-offs were $4.1 million versus $5.5 million. Nonperforming loans increased to $23.8 million from $20.1 million, primarily due to Heartland; excluding acquired loans, they were $16.5 million. The allowance was $18.3 million, or 1.52% of loans.
- Balance sheet and funding: Total assets were $1.85 billion, up $300.5 million. Loans were $1.19 billion, up 21.1%; deposits were $1.29 billion, up 28.1%. Management attributed much of the growth to Heartland, with organic loan growth of $92.9 million and organic deposit growth of $73.1 million.
- Liquidity and cash flow: Cash and equivalents were $30.7 million, up $10.3 million. Operating cash flow was $26.3 million. Management reported approximately $349.6 million of available credit lines and stated that funding sources were adequate for short- and long-term needs.
- Debt and capital: Borrowings were $345.8 million and subordinated debentures were $32.3 million. Shareholders’ equity was $159.0 million; equity/assets was 8.60%. The Bank was classified as well-capitalized, with total risk-based capital of 12.42% and Tier 1 leverage of 8.22%.
Material changes versus 2011
- Heartland contributed acquired assets of $245.6 million and liabilities of $218.7 million; Horizon issued 1,168,383 common shares and retired Heartland’s TARP preferred shares. The estimated consideration was $26.9 million, including that retirement.
- Net interest income, mortgage loan sale gains, and earnings increased. Loan-loss provision and net charge-offs declined, although reported nonperforming loans rose partly because of acquired Heartland credits.
- Expenses increased with the acquisition, expansion, higher compensation and processing costs. Income tax expense increased to $8.4 million from $4.2 million; the effective tax rate was 30.2% versus 24.6%.
- Common dividends declared increased to $0.38 per share from $0.31. Common shares outstanding increased, in part due to the Heartland stock issuance.
Outlook, risks and contingencies
- Management expected no significant near-term increase in interest rates, while anticipating a rise eventually given historically low rates. It expects Heartland to add deposits and enable transaction-cost savings and economies of scale; the filing does not provide quantified earnings guidance or savings targets.
- Management planned approximately $5.0 million of 2013 premises and equipment spending, including two full-service offices, to be funded through normal operations.
- Principal risks include loan and collateral deterioration, elevated local unemployment and consumer delinquencies, interest-rate and margin sensitivity, liquidity and funding access, mortgage warehouse fraud and counterparty exposure, competitive pressures, and regulatory change. Management cited indirect auto credit risk and real-estate exposure.
- Loan commitments were $328.9 million and standby letters of credit were $1.6 million; many commitments may expire unused. Management did not expect ordinary-course legal proceedings to materially adversely affect results or financial position.
- Series B preferred stock issued under the Small Business Lending Fund has non-cumulative dividends and restrictions that can limit common dividends and repurchases in specified circumstances. Basel III rules were not final at filing; management said their impact was difficult to predict.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How acquired Heartland loans perform, particularly the $7.3 million of acquired nonperforming loans, and whether integration savings are realized against transaction and ongoing costs.
- Whether underlying margin and earnings remain sustainable without the $1.5 million acquired-loan discount accretion and amid rate changes.
- Trends in nonperforming loans, troubled debt restructurings, consumer and indirect-auto charge-offs, and adequacy of the allowance relative to portfolio growth.
- Liquidity and refinancing needs, including near-term contractual maturities, reliance on credit lines, and funding demands from mortgage warehouse activity and commitments.
- Common-dividend capacity under regulatory limits and Series B preferred-stock terms, as well as the timing and cost of any preferred-stock redemption.