Business context and reporting period
Horizon Bancorp, Inc. (NASDAQ: HBNC) is an Indiana-based commercial bank holding company serving Indiana and Michigan. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Unless stated otherwise, dollar amounts below are in millions.
Results include Salin Bancshares from its March 26, 2019 acquisition. The transaction had an implied value of $126.7 million, funded with $102.7 million of Horizon stock and $24.0 million cash; Horizon issued approximately 6.56 million shares. Acquisition-related expenses were $5.65 million in the first half.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $41.5 | $33.6 | $75.8 | $67.0 |
| Provision for loan losses | $0.9 | $0.6 | $1.3 | $1.2 |
| Non-interest income | $10.9 | $8.9 | $19.6 | $17.3 |
| Non-interest expense | $31.6 | $24.9 | $61.3 | $50.8 |
| Net income | $16.6 | $14.1 | $27.5 | $26.9 |
| Diluted EPS | $0.37 | $0.37 | $0.65 | $0.70 |
| Net interest margin | 3.73% | 3.78% | 3.68% | 3.81% |
- Management reported record quarterly net income of $16.6 million and record first-half net income of $27.5 million. Core net income, a non-GAAP measure excluding merger costs, securities sale gains or losses and BOLI death benefits, was $17.6 million for Q2 and $31.8 million for the first half; core diluted EPS was $0.39 and $0.75, respectively.
- Q2 net income increased about 18% year over year, while diluted EPS was unchanged. First-half net income rose about 2%, while EPS fell from $0.70 to $0.65, primarily because of shares issued for the Salin acquisition.
- Q2 net interest margin was below the prior-year quarter but improved from 3.62% in Q1 2019. Management attributed the sequential improvement to higher asset yields, reduced short-term borrowing and more stable deposit pricing. First-half margin declined year over year as funding costs rose; core margin was 3.55% versus 3.61%.
- Non-interest income increased, supported by Salin and organic growth in deposit charges, interchange and fiduciary fees. Expenses also rose, largely reflecting Salin; first-half expenses included $5.65 million of merger costs.
Financial position, cash flow and liquidity
- At June 30, total assets were $5.10 billion, up $852.0 million from year-end. Net loans were $3.65 billion, up $650.9 million; total deposits were $3.93 billion, up $791.4 million. Much of the increase came from Salin, which contributed $568.9 million in loans and $741.4 million in deposits.
- Borrowings were $436.2 million, down from $550.4 million at year-end; short-term borrowings were $307.3 million versus $402.8 million. Subordinated debentures were $56.2 million, up from $37.8 million.
- Cash and due from banks was $94.7 million, compared with $58.5 million at year-end. For the six months, cash flows were $134.7 million from operating activities, $44.5 million from investing activities and a $143.0 million use in financing activities; cash and cash equivalents increased $36.2 million.
- Management cited $626.3 million of unused credit lines and $653.7 million of unpledged investment securities at June 30 as additional liquidity sources.
- Stockholders’ equity was $626.5 million, versus $492.0 million at year-end. The Bank’s June 30 regulatory capital ratios exceeded “well capitalized” thresholds; total risk-based capital was 12.23%, Tier 1 risk-based capital 11.76%, common equity Tier 1 11.76%, and Tier 1 leverage 9.52%.
- Book value per share was $13.90; tangible book value per share, a non-GAAP measure, was $9.91. The company declared $0.22 per share of dividends in the first half.
Material changes, outlook and risks
- Salin materially expanded the balance sheet and share count. Acquisition accounting remains preliminary: final fair-value estimates were pending, including for acquired loans. Management expects cost efficiencies over time, but does not quantify expected savings or provide formal earnings guidance.
- Asset quality weakened modestly in reported totals: non-performing loans rose to $18.9 million from $15.2 million at year-end, primarily due to acquired Salin loans. The allowance for loan losses was $18.3 million, or 0.50% of loans; allowance plus acquired-loan discounts equaled 1.14% of loans. Q2 provision included a specific reserve on one credit. Management cautions that future economic and portfolio developments could require additional reserves.
- Management identifies sensitivity to economic conditions, interest rates and deposit competition, credit losses and collateral values, liquidity, cyber and data-security threats, regulatory and accounting changes, technology and competition, and execution and integration risks from acquisitions. LIBOR transition and trade-related uncertainty are also noted. Management reported no significant change in interest-rate sensitivity from its 2018 Form 10-K.
- Management believes investment-security unrealized losses at June 30 were temporary and interest-rate-related, with no security deemed other-than-temporarily impaired. The company was implementing the expected-credit-loss standard (CECL); the amount of the eventual retained-earnings adjustment and overall impact could not yet be determined.
- Routine legal claims and proceedings are disclosed; management does not expect them to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is attributable to Salin versus organic performance, and how integration and anticipated cost savings progress.
- Whether rising deposit and borrowing costs continue to pressure net interest margin, particularly the gap between reported and core margin.
- Trends in non-performing loans, criticized loans, charge-offs and reserve coverage, including the specific credit behind the Q2 reserve.
- The final Salin purchase-price allocation and acquired-loan valuations, plus the eventual CECL adoption impact.
- Liquidity and capital levels after acquisition integration, dividends and any subsequent changes in funding or credit conditions.