Horizon Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; the filing also reports fourth-quarter results. Horizon is an Indiana-based commercial bank holding company operating primarily in Indiana and Michigan.
Financial performance and condition
- Profit: Net income was $66.5 million, up from $53.1 million in 2018; diluted EPS was $1.53 versus $1.38. Management reported non-GAAP core net income of $70.7 million and core diluted EPS of $1.63.
- Fourth quarter: Net income was $18.5 million and diluted EPS was $0.41, compared with $13.1 million and $0.34 in fourth-quarter 2018.
- Revenue and expenses: Net interest income increased 19.5% to $160.8 million. Non-interest income rose 25.1% to $43.1 million, while non-interest expense increased 19.0% to $122.0 million. The filing attributes much of the growth to the Salin acquisition and company expansion; 2019 included $5.6 million in merger expenses.
- Margins and returns: Net interest margin was 3.69%, slightly below 3.71% in 2018; excluding acquisition-related purchase-accounting adjustments, it was 3.57% versus 3.54%. Return on average assets was 1.35% versus 1.31%; return on average equity was 10.98% versus 11.22%.
- Loans and credit: Loans were $3.64 billion, up 20.7%, primarily reflecting Salin. Non-performing loans rose to $21.2 million from $15.2 million, or 0.58% of loans versus 0.50%. The allowance was $17.7 million, 0.49% of loans, compared with $17.8 million, or 0.59%, in 2018. Net charge-offs were $2.1 million versus $1.5 million.
- Cash flow and liquidity: Operating cash flow was $175.0 million; cash and cash equivalents increased $40.3 million to $98.8 million. Management reported $517.1 million of available credit lines and $807.4 million of unpledged investment securities. The loan-to-deposit ratio declined to 92.62% from 96.02%.
- Funding and capital: Deposits increased to $3.93 billion from $3.14 billion. Borrowings were $549.7 million and subordinated debentures were $56.3 million. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.65% and leverage ratio was 9.49%.
- Other measures: Total assets were $5.25 billion, up from $4.25 billion. Tangible book value per share increased to $10.63 from $9.43.
Material changes and notable items
- Horizon completed its $126.7 million acquisition of Salin Bancshares on March 26, 2019, issuing 6.56 million shares and paying $24.0 million in cash. The acquisition added $568.9 million of loans and $741.3 million of deposits at acquisition; $31.4 million of goodwill and $19.8 million of core deposit intangible were recorded. Purchase-price valuations were described as preliminary.
- Interest expense rose to $47.5 million from $31.6 million, reflecting higher funding costs and acquisition-related volume. Deposit costs increased, while net interest margin edged lower.
- The Board increased the quarterly dividend from $0.10 to $0.12 per share and authorized repurchases of up to 2.25 million shares. By year-end, 99,407 shares had been repurchased at an average $16.04 per share; no shares were repurchased in the fourth quarter.
- Accumulated other comprehensive income improved to $6.4 million from a loss of $8.1 million, primarily reflecting appreciation in available-for-sale securities.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management said interest rates and funding costs affect margins and reported that assets repricing within one year were 161% of liabilities repricing within one year.
- Horizon was preparing for the expected transition from LIBOR, including contracts indexed to LIBOR; the timing, replacement-rate terms, and operational effects remained uncertain.
- Horizon expected to adopt CECL on January 1, 2020. It estimated a one-time increase to the allowance for credit losses of $16.2 million to $20.8 million, subject to refinement; related governance and controls were still being finalized.
- The filing identifies credit and economic conditions, interest-rate and deposit sensitivity, acquisition integration, mortgage warehouse and indirect-lending fraud, cybersecurity, competition, and regulatory change as risks. It also flags the possible economic effects of the coronavirus, as discussed in early 2020.
- The Company planned to terminate the acquired Pentegra defined-benefit plan in 2020 and recorded a $3.1 million withdrawal liability. Management did not expect ordinary-course legal proceedings to materially affect financial position or results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for loan losses and Salin acquisition accounting were identified as critical audit matters.
Key facts for investors to verify
- How much of reported earnings growth reflects Salin versus organic growth, and whether anticipated acquisition cost savings are being realized.
- Whether rising non-performing loans and charge-offs, particularly in acquired portfolios, require higher provisions than the 2019 allowance reflected.
- The final CECL adoption adjustment and its effects on allowance coverage, capital, and future earnings.
- Deposit pricing and retention, refinancing and mortgage warehouse activity, and the effect of funding costs on net interest margin.
- Completion of Salin purchase accounting, the Pentegra plan termination, and the LIBOR transition, including any related charges or operational impacts.