Horizon Bancorp Inc. — 2017 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017. Horizon is an Indiana-based bank holding company operating through Horizon Bank, with commercial banking operations in Indiana and Michigan. The Bank had 62 full-service offices, approximately 701 employees, and $3.96 billion in assets at year-end.
Growth included the September acquisition of Lafayette Community Bancorp and October acquisition of Wolverine Bancorp, plus a Bargersville branch purchase. These transactions expanded the deposit and loan base and issued approximately 3.25 million Horizon shares in the two mergers.
Financial performance and condition
- Earnings: Net income was $33.1 million, or $1.43 diluted EPS, versus $23.9 million and $1.19 in 2016. Management’s non-GAAP core net income was $35.5 million, or $1.53 per diluted share, up 21.4% from $29.2 million and $1.45.
- Net interest income and margin: Net interest income rose 30.4% to $112.1 million. Net interest margin increased to 3.75% from 3.29%; excluding purchase-accounting adjustments and prior-year borrowing prepayment penalties, core margin was 3.64% versus 3.38%.
- Other income and expenses: Non-interest income fell 6.5% to $33.1 million, chiefly reflecting lower mortgage-loan sale gains and securities gains. Non-interest expense rose 9.1% to $94.8 million, including acquisition and growth-related costs. Provision for loan losses was $2.47 million, up from $1.84 million.
- Assets and loans: Total assets increased 26.2% to $3.96 billion. Loans rose 32.6% to $2.83 billion; excluding acquired loans, growth was 11.3%. Commercial loans were 57.1% of loans, while mortgage warehouse loans fell 30.4% to $94.5 million.
- Credit quality: Non-performing loans increased to $16.4 million from $10.7 million, or 0.58% of loans versus 0.50%; management attributed the increase primarily to acquired Lafayette and Wolverine loans. The allowance was $16.4 million, 0.58% of loans (0.81% excluding acquired-loan credit discounts). Net charge-offs were $913,000, or 0.04% of average loans.
- Deposits, funding and liquidity: Period-end deposits increased 16.6% to $2.88 billion. Borrowings were $564.2 million, versus $267.5 million, and subordinated debentures were $37.7 million. Cash and equivalents were $76.4 million. Operating cash flow was $49.1 million; cash increased $5.6 million over the year. Management reported $127.2 million of available credit lines, while noting some funding sources are uncommitted or subject to collateral availability. The loan-to-deposit ratio rose to 98.30% from 86.43%.
- Capital and shareholder returns: Stockholders’ equity was $457.1 million; tangible equity to tangible assets was 8.48%. The Bank was well capitalized; its total capital, Tier 1, common equity Tier 1 and leverage ratios were 12.85%, 12.29%, 12.29% and 9.89%, respectively. The 2017 dividend was $0.50 per share, compared with $0.41 in 2016.
Changes versus the prior comparable period
Profitability and net interest margin improved, supported by loan and asset growth, higher loan yields, interest-rate increases, and reduced funding costs after a 2016 balance-sheet restructuring. Acquisitions materially contributed to balance-sheet growth and share issuance; management reported organic loan growth separately. Non-performing loans and the allowance increased, while non-interest income declined and operating expenses rose.
Outlook, commentary, risks and unusual items
- Management anticipated higher after-tax net income in 2018 and later periods from the lower federal corporate tax rate, but gave no quantified earnings guidance and cautioned that benefits may not materialize as expected. The Tax Cuts and Jobs Act caused a $2.4 million deferred-tax-asset remeasurement charge in 2017.
- Acquisition-related items included $3.66 million of merger expenses, $3.5 million of acquisition-related purchase-accounting interest income, and a $530,000 gain from remeasuring Horizon’s prior Lafayette equity interest. The non-GAAP core results exclude specified one-time and purchase-accounting items and are not a substitute for GAAP results.
- Management identified interest-rate and deposit-pricing sensitivity, credit losses, local economic and real-estate conditions, acquisition integration and acquired-loan quality, mortgage-market dependence, fraud in mortgage warehouse and indirect lending, cybersecurity, competition, regulatory change and liquidity access as material risks.
- Loan commitments totaled $802.9 million and standby letters of credit $3.4 million; these are contingent exposures and are not equivalent to funded loans. Management anticipated no losses from these commitments. It reported no material off-balance-sheet arrangements and did not expect ordinary-course litigation to materially affect the company.
- The company recorded a $3.4 million withdrawal liability for a pension plan it intended to terminate in 2018. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is sustainable organic growth versus acquisitions, and whether expected cost savings are being realized.
- Credit performance of acquired portfolios, the increase in non-performing loans, and adequacy of the allowance relative to loan mix and growth.
- Funding costs, borrowing levels and maturities, liquidity capacity, and the high year-end loan-to-deposit ratio.
- Underlying earnings after separating acquisition costs, purchase-accounting benefits, the Lafayette remeasurement gain and the tax-law charge; compare non-GAAP measures with GAAP results.
- Effects of interest-rate changes on asset yields, deposit pricing, mortgage volumes and net interest margin, as well as execution of the 2018 pension-plan termination.