Horizon Bancorp, Inc. — 2016 Form 10-K Summary
Business and period: Horizon is an Indiana bank holding company operating as a single commercial banking segment through Horizon Bank, serving Northern and Central Indiana and Southwestern and Central Michigan. This annual report covers the year ended December 31, 2016; selected fourth-quarter results are also disclosed.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets at year-end | $3.14 billion | $2.65 billion |
| Total loans at year-end | $2.14 billion | $1.75 billion |
| Total deposits at year-end | $2.47 billion | $1.88 billion |
| Net interest income | $86.0 million | $74.7 million |
| Non-interest income | $38.0 million | $30.4 million |
| Non-interest expense | $89.4 million | $74.2 million |
| Net income | $23.9 million | $20.5 million |
| Diluted earnings per share | $1.19 | $1.26 |
| Net interest margin | 3.29% | 3.56% |
| Return on average assets | 0.81% | 0.87% |
- Management’s non-GAAP adjusted net income, excluding merger expenses, securities gains, the prior-year life-insurance death benefit, borrowing prepayment penalties, and acquisition purchase-accounting adjustments, was $29.2 million, or $1.45 diluted EPS, versus $21.7 million, or $1.33, in 2015. These measures are not GAAP results.
- Reported diluted EPS declined despite higher net income, primarily reflecting the increased share count from acquisitions.
- Year-end stockholders’ equity was $340.9 million; equity-to-assets was 10.85%, and tangible equity-to-tangible assets was 8.33%. The Bank was classified as well capitalized, with total capital to risk-weighted assets of 13.98% and Tier 1 leverage of 9.93%.
- Year-end cash and due from banks was $70.8 million, up from $48.7 million. Operating cash flow was $25.5 million. Management reported approximately $453.9 million of available credit lines and considered funding adequate for short- and long-term needs.
- Balance-sheet borrowings were $267.5 million, down from $449.3 million; subordinated debentures were $37.5 million. The filing reports total borrowings including subordinated debentures of approximately $304.9 million.
- The allowance for loan losses was $14.8 million, or 0.69% of loans, compared with $14.5 million, or 0.83%, in 2015. Non-performing loans fell to $10.7 million (0.50% of loans) from $16.7 million (0.95%); net charge-offs were $1.5 million, or 0.08% of average loans.
Material changes and unusual items
- Horizon completed acquisitions of Kosciusko Financial/Farmers State Bank in June, LaPorte Bancorp in July, and CNB Bancorp/Central National Bank & Trust in November 2016. The reported increase in assets, loans, and deposits reflects these transactions as well as organic activity. Management cited opportunity for deposit growth and cost savings, but realization of expected economies is not assured.
- Loans grew 22.1% year over year; management reported growth of 4.3% excluding acquired loans, mortgage warehouse loans, and loans held for sale. Deposits grew to $2.47 billion from $1.88 billion.
- Net interest margin was affected by $4.8 million of prepayment penalties paid in a borrowing and balance-sheet restructuring, as well as acquisition purchase-accounting adjustments. Fourth-quarter reported margin was 2.92%, versus 3.37% in the prior quarter and 3.50% a year earlier; management’s adjusted “core” fourth-quarter margin was 3.45%.
- Merger expenses were $6.8 million in 2016. Securities-sale gains were $1.8 million, compared with $0.2 million in 2015. Non-interest expense increased 20.5%, reflecting acquisitions, expansion, and related costs.
- Horizon redeemed its $12.5 million Series B preferred stock in February 2016. It declared $0.41 per common share in dividends for the year, compared with $0.39 in 2015.
Outlook, risks, and contingencies
- No quantified earnings or growth guidance is provided. Management said it did not expect significant near-term rate increases, while expecting rates to rise at some point from historically low levels. It emphasized that interest rates are driven by external factors.
- Key risks include credit deterioration and real-estate collateral values; interest-rate changes, deposit outflows, and net interest margin pressure; liquidity and funding access; competition from banks and financial-technology providers; acquisition integration and realization of cost savings; and fraud, cyberattacks, operational failures, and regulatory change.
- The filing identifies uncertainty over the tax treatment and regulatory implications of captive insurance activities following a November 2016 Treasury/IRS notice. Horizon had two captive insurance companies at year-end.
- Loan commitments totaled $808.3 million and standby letters of credit approximately $1.0 million; the filing says commitments may expire unused and no losses were anticipated. Management did not expect ordinary-course legal proceedings to materially affect the company.
- Horizon stated that it expected the new credit-loss accounting standard (CECL) to require a one-time allowance adjustment, but could not yet estimate its size. It also anticipated that the new lease standard would increase assets and liabilities by approximately $80–$100 million based on leases outstanding at year-end 2016.
- The Bank applied to convert from a national bank to an Indiana state commercial bank in January 2017; approval and resulting regulatory changes were pending. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management assessed controls as effective.
Most important facts for investors to verify
- How much of loan and deposit growth, and future earnings, is attributable to the 2016 acquisitions versus organic growth; whether promised integration savings are being achieved.
- Whether underlying net interest margin stabilizes after excluding the one-time borrowing penalties and acquisition accounting, and how rate changes affect funding costs and asset yields.
- Whether allowance coverage remains appropriate as the loan portfolio expands, particularly in commercial, consumer, and real-estate lending; track acquired-loan performance and non-performing assets.
- The sustainability of earnings after merger costs and securities gains, and the effect of share issuance on per-share results.
- Liquidity and refinancing exposure, including significant 2017 contractual maturities and the conversion of loan commitments into funded balances.
- Potential effects of captive-insurance tax developments, CECL implementation, and the pending bank-charter conversion.