Horizon Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; fourth-quarter figures are identified separately below. Horizon is an Indiana bank holding company operating Horizon Bank, a single-segment commercial bank serving northern and central Indiana and southern and central Michigan through 73 full-service offices.
Key financial results and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets at year-end | $5.887 billion | $5.247 billion |
| Total deposits at year-end | $4.531 billion | $3.931 billion |
| Loans, gross | $3.867 billion | $3.637 billion |
| Net interest income | $170.9 million | $160.8 million |
| Net interest margin | 3.44% | 3.69% |
| Credit loss expense | $20.8 million | $2.0 million |
| Non-interest income | $59.6 million | $43.1 million |
| Non-interest expense | $131.4 million | $122.0 million |
| Net income | $68.5 million | $66.5 million |
| Diluted earnings per share | $1.55 | $1.53 |
| Return on average assets | 1.22% | 1.35% |
| Return on average common equity | 10.29% | 10.98% |
| Reported efficiency ratio | 57.01% | 59.86% |
| Allowance for credit losses at year-end | $57.0 million | $17.7 million |
For fourth-quarter 2020, net income was $21.9 million and diluted EPS was $0.50; net interest income was $43.6 million.
- Profitability and revenue: Annual net income rose 3.0%, while net interest income increased 6.3%. Non-interest income grew 38.5%, led by mortgage loan-sale gains of $26.7 million, up from $9.2 million. Mortgage originations were $756.9 million, up 85.1% year over year.
- Margins and expenses: Net interest margin fell 25 basis points to 3.44%, reflecting lower asset yields. Management’s adjusted margin, excluding purchase-accounting adjustments and borrowing prepayment penalties, was 3.38%, versus 3.57% in 2019. Adjusted efficiency ratio was essentially unchanged at 57.20% versus 57.23%.
- Credit quality: The allowance equaled 1.47% of total loans and 212.7% of non-performing loans. Non-performing loans were $26.8 million, or 0.69% of loans, versus $21.2 million, or 0.58%, in 2019. Net charge-offs were 0.05% of average loans. COVID-related deferrals declined to $126.7 million, or 3.3% of loans, by year-end; the company reported no material specific loan losses attributed to COVID-related closures in 2020.
- Cash flow and liquidity: Operating cash flow was $78.8 million, down from $174.4 million; cash and cash equivalents increased $150.9 million to $249.7 million. The company reported approximately $1.6 billion of cash and investment securities and $1.04 billion of available credit at year-end. The loan-to-deposit ratio improved to 85.65% from 92.62%.
- Debt and capital: Balance-sheet borrowings were $475.0 million, down from $549.7 million; subordinated notes were $58.6 million and junior subordinated debentures were $56.5 million. The bank was categorized as well capitalized: total risk-based capital was 12.21%, common equity Tier 1 was 11.29%, and Tier 1 leverage was 8.71%.
- Equity and distributions: Book value per share rose to $15.78 from $14.59; tangible book value per share rose to $11.81 from $10.63. Dividends declared were $0.48 per share. The company repurchased $19.6 million of stock during 2020.
Material changes, outlook, risks, and unusual items
- Horizon adopted CECL on January 1, 2020, recording a $22.6 million increase in the allowance at adoption and a $15.6 million reduction to retained earnings. The year-end allowance also reflects an economic forecast and reserves for portfolios considered more exposed to pandemic-related stress.
- Deposit growth of $600.1 million was attributed primarily to customer stimulus payments and commercial customers’ PPP proceeds. PPP loans totaled $208.9 million at year-end. Mortgage warehouse loans increased 163.2% to $395.6 million, while residential mortgage loans declined 20.3% to $598.7 million amid refinancing activity.
- Mortgage servicing income, net of impairment, was a loss of $3.7 million, including $4.5 million of net impairment charges. The company also recorded $4.3 million in gains on securities sales and $3.8 million in borrowing prepayment penalties after paying off $83.0 million of FHLB advances in the fourth quarter.
- Horizon issued $60 million of 5.625% fixed-to-floating subordinated notes in June 2020, due in 2030. A defined-benefit pension plan termination generated $460,000 of additional expense. No goodwill impairment was recorded despite pandemic-related market volatility.
- Management provided no specific financial guidance or numerical earnings outlook in the filing. It said liquidity and funding were adequate, while noting that low rates, borrower performance, pandemic developments, and economic recovery remain uncertain. The filing describes material risks from COVID-19, credit losses and collateral values, interest-rate and funding sensitivity, competition and technology, cybersecurity and third-party providers, acquisitions, and the transition away from LIBOR.
- Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements. The allowance for credit losses and goodwill impairment analysis were identified as critical audit matters. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How CECL assumptions and the pandemic-related forecast support the $57.0 million allowance, particularly as deferrals expire and economic conditions change.
- Whether rising non-performing loans and criticized commercial credits lead to additional provisions, charge-offs, or collateral losses.
- How sustainable elevated mortgage-sale gains are, and whether mortgage servicing impairment and prepayment activity continue to pressure fee income.
- How deposit balances, loan growth, and the large mortgage warehouse portfolio affect funding needs, liquidity, and net interest margin.
- The terms and refinancing exposure of borrowings and subordinated debt, including floating-rate and LIBOR-linked instruments and the company’s transition plan.
- Whether reported earnings trends remain consistent after considering non-GAAP adjustments, CECL adoption effects, securities gains, and borrowing prepayment penalties.