Horizon Bancorp, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; year-over-year comparisons are to 2010. Horizon is a community bank holding company operating primarily in northwestern Indiana and southwestern Michigan. Figures are in U.S. dollars; financial amounts are in millions unless otherwise stated. Fourth-quarter figures are unaudited.
Financial performance and condition
| Metric | FY 2011 / year-end | FY 2010 / prior year-end |
|---|---|---|
| Interest income | $64.6 | $68.5 |
| Net interest income | $48.1 | $47.6 |
| Net interest margin | 3.74% | 3.80% |
| Non-interest income | $20.3 | $19.9 |
| Non-interest expense | $46.1 | $42.6 |
| Provision for loan losses | $5.3 | $11.6 |
| Net income | $12.8 | $10.5 |
| Diluted earnings per share | $2.27 | $1.81 |
| Operating cash flow | $22.4 | $24.9 |
| Total assets | $1,547.2 | $1,400.9 |
| Total loans | $983.2 | $882.9 |
| Total deposits | $1,009.9 | $985.5 |
| Borrowings | $370.1 | $260.7 |
| Stockholders’ equity | $121.5 | $112.3 |
- Net income available to common shareholders was $11.5 million. Return on average assets was 0.90%, return on average equity was 11.20%, and the loan-to-deposit ratio was 97.36%.
- Fourth-quarter net income was $3.52 million, or $0.68 diluted EPS, the company’s highest quarterly result to that date.
- Cash and cash equivalents increased $4.8 million to $20.4 million. Cash flows were $22.4 million provided by operations, $142.2 million used in investing, and $124.6 million provided by financing.
- Management reported approximately $288.7 million in available credit from various sources. The Bank had $174.3 million of FHLB advances; total borrowings also included repurchase agreements and federal funds purchased. Subordinated debentures were $30.7 million.
- Regulatory capital remained above well-capitalized thresholds: Bank Tier 1 risk-based capital was 11.86%, total risk-based capital 13.12%, and leverage capital 8.50%.
Changes versus 2010
- Net income rose 22%, despite interest income declining about $3.9 million. Lower funding costs reduced interest expense by $4.4 million, and net interest income increased 1.1%.
- The lower loan-loss provision was a major earnings contributor. Net charge-offs declined to $5.5 million from $8.5 million; the allowance ended at $18.9 million, or 1.89% of loans, versus $19.1 million, or 2.11%.
- Loans grew 11.4%, largely from mortgage warehouse lending, which increased 68.3% to $208.3 million. Deposits grew 2.5%; average balances shifted toward lower-cost transactional deposits.
- Borrowings increased $109.4 million. Non-interest expense rose 8.4%, partly reflecting higher salaries, benefits, loan workout costs, and other losses.
- Nonperforming loans fell to $20.1 million, or 2.02% of loans, from $21.4 million, or 2.38%. However, troubled debt restructurings increased to $5.7 million from $4.4 million, and other real estate owned was $2.8 million.
Outlook, risks and notable items
- Management said it did not expect a significant near-term rise in interest rates, while anticipating rates would eventually increase from historically low levels. It described funding as adequate for short- and long-term needs; no numerical earnings guidance was provided.
- Local economic weakness and elevated unemployment continued to pressure borrowers. Key exposures include commercial and consumer credit, real estate collateral, indirect auto lending, mortgage warehouse activity and possible fraud by third-party originators.
- Interest-rate changes may affect margins, deposit costs, loan demand, prepayments and investment values. Management reported a 6-basis-point decline in net interest margin to 3.74%.
- Unusual or nonrecurring items included a $1.8 million securities-sale gain, a $798,000 FHLB advance prepayment penalty, a $453,000 officer life-insurance death benefit, and other losses that included OREO and bank-property write-downs and a lawsuit settlement. Management said securities unrealized losses were temporary and reported no other-than-temporary impairment at year-end.
- In August 2011, Horizon issued $12.5 million of Series B preferred stock under the Small Business Lending Fund and redeemed its remaining $18.75 million of TARP Series A preferred stock. Series B dividends are non-cumulative and its terms restrict certain common-stock dividends and repurchases.
- After year-end, Horizon agreed to acquire Heartland Bancshares for an estimated $14.0 million in stock, subject to adjustments, approvals and other conditions; closing was anticipated in the second quarter of 2012. Horizon also agreed to fund the purchase of Heartland’s Treasury preferred shares with $7.248 million aggregate liquidation value.
- The filing identifies regulatory change, competition, funding access, technology and operational risks, and uncertainty in asset valuation and loan-loss estimates. Management assessed internal controls as effective; the independent auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether the decline in credit costs is sustainable, including trends in nonperforming loans, TDRs, charge-offs, consumer delinquencies and allowance coverage.
- How the rapid growth and funding needs of mortgage warehouse loans affect credit, liquidity and concentration risk.
- Whether margin pressure continues and how asset yields and deposit costs respond to interest-rate changes.
- The composition, cost and maturity profile of borrowings, and the availability and terms of contingent credit lines.
- Final Heartland merger consideration, regulatory and shareholder approvals, integration costs, and the effect on capital, earnings and dividends.
- Series B preferred dividend terms and restrictions, and the bank’s capacity to upstream dividends to the holding company.