Horizon Bancorp, Inc. — 2018 Form 10-K Summary
Business context and reporting period. Horizon is an Indiana-based bank holding company operating through Horizon Bank, a commercial bank serving Indiana and Michigan. This is the annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. The Bank had 63 full-service offices, approximately $4.25 billion in assets and $3.14 billion in deposits at year-end.
Financial performance and position
| Metric | FY 2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Net interest income | $134.6 million | $112.1 million in 2017 |
| Non-interest income | $34.4 million | $33.1 million in 2017 |
| Net income | $53.1 million | $33.1 million in 2017 |
| Diluted EPS | $1.38 | $0.95 in 2017 |
| Net interest margin | 3.71% | 3.75% in 2017; core margin excluding acquisition purchase-accounting adjustments was 3.54% versus 3.64% |
| Provision for loan losses | $2.9 million | $2.5 million in 2017 |
| Total assets | $4.25 billion | $3.96 billion at year-end 2017 |
| Total loans | $3.01 billion | $2.84 billion at year-end 2017; up 6.3% |
| Total deposits | $3.14 billion | $2.88 billion at year-end 2017; up 9.0% |
| Borrowings / subordinated debentures | $550.4 million / $37.8 million | $564.2 million / $37.7 million at year-end 2017 |
| Cash flows | Operating +$72.4 million; investing -$303.9 million; financing +$230.0 million; cash decreased $1.5 million | Cash increased $6.6 million in 2017 |
Other key measures. Return on average assets was 1.31% (0.97% in 2017); return on average equity was 11.22% (8.74%). Year-end stockholders’ equity was $492.0 million, and tangible book value per share was $9.43 versus $8.48. The allowance for loan losses was $17.8 million, or 0.59% of loans; net charge-offs were $1.5 million, or 0.05% of average loans. Non-performing loans declined to $15.2 million, 0.50% of loans, from $16.4 million, 0.58%.
At year-end, the Bank was classified as well-capitalized. Its total risk-based capital ratio was 12.43%, common equity Tier 1 ratio 11.87%, and leverage ratio 9.34%. Management reported approximately $340.3 million of available credit from money-center banks, including the FHLB and Federal Reserve Discount Window; unpledged investment securities were approximately $648.6 million. The loan-to-deposit ratio was 96.02%.
Material changes versus 2017
- Net income rose 60% and diluted EPS rose from $0.95 to $1.38. Management attributed the improvement mainly to higher net interest income and lower income taxes, partly offset by higher expenses and loan-loss provision.
- Net interest income increased 20%, reflecting loan and asset growth, higher asset yields, and acquisition-related purchase-accounting accretion. Interest expense rose to $31.6 million from $16.4 million as deposit and borrowing costs increased; margin narrowed four basis points.
- Loans grew 6.3%. Consumer loans increased 19.2%, residential real estate loans 9.6%, and commercial loans 3.1%; mortgage warehouse loans declined 21.6% amid higher rates and lower refinance activity.
- Average deposits increased $463.8 million, influenced by branch and bank acquisitions. Higher-cost time deposits grew substantially, and the average rate paid on interest-bearing deposits increased.
- Non-interest expense increased 8.1% to $102.5 million, including higher salaries, benefits, loan costs, data processing and FDIC insurance. Lower acquisition-related professional and consulting costs partially offset increases.
- Unrealized losses on available-for-sale securities increased; year-end accumulated other comprehensive loss was $8.1 million versus $3.6 million a year earlier. Management attributed securities losses primarily to interest-rate changes and did not identify any as other-than-temporary impairment.
Outlook, transactions, risks and unusual items
- Outlook: The filing provides no specific earnings, revenue or margin guidance. Management said funding sources were adequate for short- and long-term needs, while noting that higher funding costs had pressured margin. Management expected tax reform to benefit after-tax earnings but cautioned that competitive responses and other effects could reduce the benefit.
- Pending Salin acquisition: Horizon agreed to acquire Salin Bancshares and Salin Bank, with closing anticipated in the first quarter of 2019 subject to shareholder, regulatory and other approvals. Salin reported approximately $929.4 million of assets, $749.5 million of deposits and $593.7 million of loans at year-end. Stated transaction value was approximately $135.3 million based on Horizon’s October 26, 2018 share price; consideration includes Horizon shares and cash.
- Interest-rate and funding risk: Deposit pricing rose during the 2018 rate-increase cycle. Horizon identified potential deposit outflows, higher funding costs, reduced mortgage demand and pressure on net interest margin as risks. 2019 certificates of deposit maturities were approximately $525.9 million.
- Credit and operational risks: The loan book has significant commercial and consumer exposure; consumer lending growth and indirect auto lending warrant monitoring. The filing also highlights mortgage warehouse and indirect-loan fraud risk, cybersecurity and vendor dependence, competition, regulatory change, and acquisition integration and credit-quality risks.
- Unusual items: 2018 included $6.1 million of acquisition-related purchase-accounting interest income, a $443,000 loss on securities sales, and a $154,000 bank-owned life-insurance death benefit. The company recorded a $3.2 million withdrawal liability related to its planned 2019 termination of the Pentegra defined-benefit plan. In 2017, tax reform caused a $2.4 million deferred-tax revaluation charge.
- Contingencies and controls: Management said ordinary-course litigation was not expected to materially affect results. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed disclosure controls and internal controls as effective.
Important facts for investors to verify
- Whether the Salin transaction closed as expected, its final purchase accounting, integration costs and realized synergies.
- Whether loan and deposit growth can continue without further margin compression, particularly as time deposits reprice and mature.
- Credit performance in the fast-growing consumer and indirect-auto portfolios, including charge-offs, delinquencies and reserve adequacy.
- The durability of 2018 earnings growth after separating acquisition purchase-accounting income, tax-rate effects and other non-core items; core net income was a non-GAAP measure of $48.9 million.
- Liquidity and funding capacity against large near-term certificate maturities, loan commitments of $873.8 million and reliance on wholesale borrowing capacity.
- Potential effects of interest-rate changes on securities values, mortgage servicing rights, deposit behavior and net interest margin.
- Implementation of the expected Pentegra plan termination and any resulting cash or earnings effects.